First of all I apologize that it has been a long time since the last post.  The holiday season this year has been more challenging than most. 

The winter months have always been difficult for most contracting businesses because of weather-related work delays.  During these months contractors basically live off their savings that they built up during the peak summer months. 

November and December add additional challenges because with the holidays we typically can only work about 70% of the time on “revenue generating” field activities while maintaining most of our overhead costs. 

With the economy having depleted most of the profits that contractors made during the summer and also making 2009 backlogs weak the months of November and December have been especially trying. 

We have been working with our clients relentlessly during the last couple months helping them get through these months.  The basics are simple – the execution is very, very hard:

1. Shed ALL costs that don’t generate profits and cash
2. Be relentless about selection of revenue

Regarding item #1 when we say ‘ALL’ we mean ‘ALL’.  Literally you should run a report from your accounting system listing out every expense for the last three months and go through it line-by-line.  Every expense should be looked at and ranked in descending order about how it is linked to profitability and cash generation. 

Don’t try to make too many stretches here – if there doesn’t seem to be a direct link between an expense and profitability or cash then there probably isn’t!  For some more ideas on cutting costs there is an article by our LeAnn Evoniuk, our Financial Solutions manager: 

Cut the Fat, Thriving During an Economic Downturn

(http://www.dbrownmanagement.com/docs/article_cut_the_fat.pdf)

Regarding item #2 – this is just as critical.  Cutting costs is a huge first step but you usually can’t cost-cut your way to profitability.  The other side of the equation is that you need to bring in high-quality revenue. 

This sounds like common sense but typically when we end up doing a revenue analysis with a company we find a lot of inefficiency in the use of resources.  Here’s where to start:

1. Going back 24 months make a list that contains all projects with revenue, direct job costs, margin and completion date
2. Add in fields for customer and type of work (service, commercial, healthcare, industrial, etc.)
3. Summarize the list by customer listing the quantity of projects, last completion date, totals for revenue and profit and then add two columns showing the percentage of total revenue and percentage of total margin – Microsoft Excel has a feature called ‘Pivot Table’ that is perfect for this analysis
4. Sort the list in descending order by percentage of percentage of total margin
5. Sort another list in descending order by percentage of total revenue
6. Sort one more list in descending order by the last completion date

Now is time to sit down with your top team and start asking some hard questions.  Don’t stop with the surface level answers – dig down peeling back the layers of the onion on every one of these:

1. Review the list sorted by margin and look at the sources near the top.  Hopefully none of your customers make up more than 15% of your margin – if they do you may have too much concentration with one customer leaving you exposed if they run into problems.  If this is the case you should be looking hard at how to diversify a little more. 
2. Start adding up the percentages of total margin on the list and find those that create 80% of your total margin.  Most likely this list is relatively short compared to the total customers served.  Start brainstorming the ways to develop new customers that fit the profile of these “Top Producers”
3. Review the list sorted by “Last Date” and see if there are any opportunities there to recapture revenue from past customers.  If there are customers on this list that fall within your “Top Producer” category that you haven’t done work for in a while it is probably worth starting there from a business development perspective.
4. Look at the bottom of the list sorted by margin and start at the bottom having a very thorough discussion about each starting at the bottom and working your way up – the key question:  “What value does this customer truly add to our business?”  Like the expenses now is not the time to mince words – be relentless.  If you can’t clearly articulate the value the customer adds to your company then start looking for ways to shed these “Bad Customers” in a way that won’t hurt your reputation.

How many of your expenses have gone into supporting “Bad Customers?”  You may want to go back to your review of expenses and take another look.

This exercise should give you a much clearer idea about where your money and profits are truly coming from.  There are additional elements that we will discuss more in the future but this will get you started improving both the quality and quantity of your revenue.

The basics – you need to be relentless in your focus on high-quality revenue. 

My six year old daughter is just learning about money and already has the basics mastered.  For the last few years she has really liked the spare change – it is shiny, heavy and fun to play with.  Now that she is getting old enough to want important things like dolls and such from the store she has realized that pennies, nickels, dimes and even quarters don’t go that far!  Starting appropriately on January 1, 2009 she woke up and simply stated

“I don’t want to get paid in quarters – I need DOLLARS!“ 

I can’t think of any simpler of a way to describe the revenue strategies that we need to focus on to work our way through the current economy. 

Closing on a positive note EVERY one of our clients who has been relentless about business development during the last few months has actually increased revenue even during the downturn.  I cannot reiterate how critical aggressive business development is during these times.

Tags: construction, marketing, Revenue

This entry was posted on Tuesday, January 13th, 2009 at 9:49 am and is filed under David Brown Blog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.