Dear Jayme,
My paving business is doing okay. We're growing at about 20 percent a year. But it seems like the bigger we get, the more problems show up and my profitability seems to drop. Can I just make this up with more revenue?
Randy
Dear Randy,
Occasionally I'll hear: "I may not be making any money now, but I'll make it up in volume."
This is very dangerous thinking: Whatever problems exist in your construction business when it's small will only be magnified when it grows, and its growth will be strangled as well. Another danger sign here is not knowing why your profitability stinks. Gross margin too low? Why? Overhead too high? How come? If you don't have the data, systems or analytical skills to answer those questions today, more revenue will create far more problems than it will solve.
Your contracting business needs a solid foundation before you get all excited about growth. It's just like a building's foundation-it ain't glamorous or pretty, but it's essential to making the rest of the structure work. That's why there are few more ominous statements than "You've got foundation problems."
If your business isn't built on tight, proven systems that direct and monitor your operations and create consistent results, you can't know your cost structure, see where your problems are or delegate work to others. Existing problems and gaps will be magnified as the business grows, and instead of getting more profit, you'll find yourself with more headaches.
Think about a golf shot. If you have a chronically bad swing and mishit a nine iron, it'll go twenty yards off line, but if you mishit a big drive, you'll be in the next fairway. The same flaw becomes a much bigger problem. And the harder you swing, the more trouble you're in.
Early on, many contractors are too busy getting established to worry much about systems and processes, but when you get above a few hundred thousand, it's time to get serious about positioning your business for the next stage. That means creating a foundation of systems and processes now that can handle two or three times the business later.
Your business's foundation consists of the policies, procedures and systems that control and monitor your business. These things are no more glamorous than a building's foundation, but they're the underpinnings of everything you build later. Have a haphazard bidding process? Just wait until you're trying to do three times as many bids. Invoicing and receivables a mess? Think about another fifty concurrent jobs. Problems with crew scheduling, inconsistent quality, iffy cashflow? Does that make your stomach turn?
Double in size and things don't get twice as complex, they get ten times as complex because there are far more than double the interrelationships to maintain. It's simply impossible for a human to manage all of this in his head, and that's why, after a few years of 70-hour weeks, intense frustration, stalled progress and not enough money, my phone rings.
Just like a building, there's no alternative to a good foundation for your business. And like all the prep work nobody sees, it's the least exciting part of the job, but also the most important. Take the time, do it right, and you can build great things on top of it.
Cheers!
Jayme
Construction Business Owner, September 2009
