Growing Pains
Are you suffering from growing pains? Have you got speed wobbles?
For many businesses the Christchurch rebuild has resulted in a rapid growth opportunity. There are obvious upsides to such growth. But beware the pitfalls which could detract from the rewards of that growth. Christchurch is a topical case in point, but the risks and rewards of sudden growth apply to any boom situation.
Stay in control
It’s not uncommon for company owners to make a step-increase in revenue but lose control of their business. Witness the number of Christchurch building firms which have gone into liquidation recently.
Not all revenue is profitable. In Christchurch, much of the increased activity is at very tightly controlled prices, as those who hold the purse strings are understandably keen to prevent runaway inflation. Agents representing central and/or local government (Fletcher EQR, SCIRT) are legally obliged to demonstrate value for money. For work of this nature to be profitable, you will have to be even more lean and efficient than you already were, while remaining fully compliant with quality, health, safety and environmental requirements. It might be a question of scale. If margins are slim, you need scale to be profitable. For some, it’s a step too far.
The size of your business in terms of numbers of employees can be a critical factor. There is a “difficult” range of between about 25 and 50 employees, where it can be very hard to be efficient. At 25 staff or less it is relatively straightforward to retain tight control. At more than 50 staff it’s viable to put in place another layer of support and supervision. But that middle stage can be awkward. There can be a step-increase in the overhead and support requirements, with only a linear increase in revenue. Many businesses struggle in this range.
Some will try to benefit from the growth without structuring the support appropriately. This can appear to work in the short term, but control quietly slips away. Then trouble creeps in. The owner / manager is spread too thin. Quality issues start to arise. Costs are not tracked. Jobs start to lose money. But you’re busier than ever and there just isn’t time to address the root causes. Besides, you’re growing like mad, revenue is going through the roof. It must be good, right? Maybe not.
Consider the situation where you are paying $25 per hour for your labour, and charging out at $40 per hour. You may be losing money. By the time you factor in holiday pay, sick pay, ACC, Kiwisaver, training time, training expenses, personal protection equipment, other on-costs and the big one –down time – are you making a profit? Productivity, or conversely, down time, can be a killer. Add to the mix the fact you are growing – taking on new staff. They have to be trained and inducted into your operations and practices. It’s unlikely they will immediately be fully productive. Increasing staff in small numbers is much easier. They can be readily absorbed into the operations with sufficient experience and support around them to be effective. But taking on a whole new crew is a different story. How will you ensure they comply with your business practices? Have you got the supervisors to direct and support them? What will happen if you don’t?
Don’t become the business owner who is working longer and harder than ever before, getting frustrated, dealing with more problems, feeling out of control - and making less money.
Back office processes
Are your back office processes adequate to handle the increase in activity? Is your data collection in the field sufficiently robust? A breakdown anywhere in the process can lead to revenue leakage. The work is done, the cost has been incurred, but the client is never charged. It’s scary. It happens. Processes under pressure from rapid growth are fertile ground for missed revenue. Clients can be relied on to be diligent at picking up over-charging. With under-charging, not so much.
At the same time, manage your suppliers and subcontractors. The last thing you want is a nasty shock from a large unexpected bill. Your processes and people must be able to manage your commitments.
And get your claims in on time. Clients don’t like nasty surprises either. Claim in a timely fashion and the entire process will run more smoothly. Issues can be resolved promptly rather than fester and escalate. If you’re a subcontractor, it’s just as important. Make the head contractors’ lives easier and they’ll love you for it.
At all times, remember CFIMITYM - Cash Flow Is More Important Than Your Mother.
What happens when it’s all over?
The elephant in the room. You’ve geared up, you’ve put systems and processes and supervision and support in place. You’re driving efficiency and enjoying the benefits of growth. The company is leaner, stronger, more robust than it was. What happens after the boom? When things start to go a bit quiet. Can you replace that revenue by diversifying? All your competitors are planning on grabbing their piece of the Diversify-Pie as well. Eventually someone, if not everyone, is going to miss out. Be prepared. If you can’t replace the revenue, have a strategy to manage the downward slope.
Have a strategy. Enjoy your growth. Put in place great people, processes and systems. Use the opportunity to become stronger and smarter and optimise the opportunity in front of you. Maximise the returns on your efforts by doing the right things, not just more of the same things. And think about putting resources into controls and support for the business instead of that new Ford Ranger.
