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Financing
growth: PART I
Investment is the foundation on which to build your business.
By Mike Draper
In this two-part article, contractor coach Mike Draper looks at the most common dilemma faced by professional renovators: If you don’t add people and build a proper company, you will forever remain a one-man show with an income that will soon hit a ceiling. That’s okay for some. But if you want to build something bigger, you’re going to have to plan for it, and pay for it — at least in the short term.
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as your business been stuck at the same level? No matter what you try, no matter how hard you work, you can’t seem to get your business to break through. If so, these next two articles just might provide the answer you have been looking for. In this two-part series on Financing Growth, we
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are going to explore different ways that you can grow your company. In this issue I will suggest how to look at your business with fresh eyes and why there are good arguments for you to finance the growth of your business – if you want to grow beyond the one-man-show tradesman model and build a company. In the next issue, Part 2, we will
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talk about specific ways to finance that growth.
Why have you hit a plateau? Regardless of the level of a business, most will eventually hit a plateau because it is impossible to continue to grow forever doing the same things with the same people. Businesses have to be nimble and ready to make changes. Things that you might not have today may be needed in the future. If you are the only person in your company and working 50 hours per week, you can’t double your revenue doing the same things as you are doing now by working 100 hours per week, week in and week out. It’s not sustainable. Working more hours is not the answer. It’s true you can grow to certain level by working harder, but you will still hit a ceiling if you don’t change how you do things. I haven’t seen a single renovation contractor who works ridiculous hours and makes much more money. In fact, long hours worked by the owner, without proper staffing and resources, leads to poor performance, meager profits and less money. There are many different ways to grow, but the one thing that all growing businesses have in common is a plan. You have to have a crystal clear vision of where you want to get to and a plan of how to get there. If you don’t know where you want to go, it is impossible to know how to get there. If you don’t have a vision and a plan, you are already there…that is, nowhere.
Do you have a vision and a plan? Write down where you want your business to be three years from now. Three years is a good timeframe as it is close enough that it is motivating and you can clearly see what is realistic. It is also far enough out that you have time to reach your vision. Once this goal has been established, it is time to look at what it will take to get there. If you can’t plan for it on paper, there is no way you will figure it out as you go. Your vision statement has to answer some basic, but very important questions:
• What customers do we serve? Who is our target market? Hint: the narrower your target market the better. You can’t be all things to all people. • What do we do for those customers? • How do we serve those customers? What technology, systems and processes do we use that ensure customer satisfaction? • What makes us unique? This is a tough question for most renovation contractors. Everybody says things like: good quality workmanship, good service, trustworthy, has been in business for many years, is family owned, etc. Those things are all great, but we are looking for what sets you apart here. What really makes you different from other contractors?
Who would you have to hire to grow? Spend some time looking at what you would have to do to take on the amount of work you need to reach your target. Would you have to add more crews to handle more work? Would you have to hire a lead carpenter, site supervisor or project manager to look after your projects? Would you need to hire a sales person or an estimator to win the projects? Would you need to hire a bookkeeper and/or administrative person to help with all of the invoicing, bill payments, and looking after the paperwork? When you finish planning what your company needs to look like three years from now in order to reach your vision, you have completed the first part of your business plan, which is a critical step in your success. You have now worked out how you can get there. Now look at your finances. How are you going to fund all those new people, systems and resources that you need to do all of the work? Next to a lack of vision, the lack of a financial plan is a major stumping block for most contractors. Without the financial capability in place, the company can’t achieve the vision.
Let’s look at the numbers Let’s use the example of a renovation contractor www.canadiancontractor.ca
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who is doing $600,000 in sales and is trying to break the $1 million mark. He is most likely working very long hours on the job site as the site supervisor, running to visit new leads, doing estimates for prospects, closing projects and then spending his evenings doing paperwork. He is already working 12 to 14 hour days and can’t work any harder. He most likely wants to work fewer hours. How does this contractor get from $600,000 to a $1,000,000 without hiring more people? He can’t. He has to hire someone or multiple people to handle some of the workload if he has any hope of getting to $1,000,000 in sales. The problem that most contractors face is that there typically is not enough profit at $600,000 to hire another person. The decision of when to hire more staff and how to pay for them is difficult. The lack of a vision and both operational and financial plans are the primary reasons why most small contractors can’t decide to invest in their businesses and stay small. The next dilemma for this contractor is that he knows that if he gets his business to $1,000,000, he may not be able to pay for the extra help. But unfortunately, he won’t get there if he doesn’t hire staff because he wouldn’t have the capacity to do the work without them. This doesn’t mean that expansion can’t happen. It means that it must be carefully planned. Planning how to fund your growth is critical at this point. Here is what I am getting at. Most growth requires an investment. If you aren’t willing to invest in your future, then you are already in your future. Not investing in what it takes to grow means you will stay the same.
Accepting risk for the short term The hard fact is, the only way to grow is to accept some risk for the short term. Your investment in your future will mean that you do not have as much money now as you would if you didn’t invest. You have to realize that in the short term it will look
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like you are going backwards. However, when you follow your plan you know that you will come out ahead. It is like building a home. In order to build up, you first have to dig down. You have to dig down in order to put in the footings, which are ultimately the foundation of the house. The building can now be built up. Your business is no different. You will most likely see profit go down as you fund growth but the investment is the foundation on which to build your business. Investing in resources to help you build your business is a fundamental element in your success and it all starts with a well thought out financial plan. This is a good time to mention how important cash flow is when expanding. Understanding the cash needs of your business is critical. If you would like us to send you a cash flow forecast sheet, send an email to mike.draper@renovantage.com. The cash flow forecast sheet will help you plan what your cash needs will be as your business expands. It will show you how much cash you will need to inject into your business. The key is to make the investment as low as possible, to know how much is needed, when you will need extra money and when you can expect a return on your investment. In Part 2, we will talk about ways to manage cash flow and sources of funds to finance your growth.
Get going: Take action! Armed with a vision of where you want your business to be, how you will get there and a financial plan, you are well on your way. Now it is all about execution. Should you find yourself deviating from your plan, get back on track as quickly as possible. Lastly, you must have confidence and stay focused. In the next issue of Canadian Contractor (Sept/ Oct 2013), we will explore different options for financing your growth. Having looked at the pros and cons of each, you will then need to decide which way is best for your business. cc