Richard E. Gavin, CPA, CCIFP and William E. Fischer, CPA are partners in the construction practice of GRASSI & CO. CPAs and Success Consultants® based in Lake Success, NY. They are active in a variety of construction industry trade and business groups and have lectured and written extensively about construction accounting and other business topics. They can be reached at: 516.256.3500
Achieving success in today's business environment is an increasing challenge. There are a myriad of pitfalls that can await even the most competent construction company executive-labor issues, supply problems, timely payment, inclement weather and a host of others. How can a construction company owner navigate this climate?
If you were to set off on a long trip, you probably would not think of leaving until you had a set of detailed directions-a roadmap, if you will-of where you were headed, the key points along the way, relative distances and some idea of how long it would take you to get there. The same is true for planning your business journey. You must have a business plan, or roadmap, for your business success.
A Good Business Plan Contains the following:
- Executive Summary
- Table of Contents
- Company Description
- Market Analysis
- Marketing Plan
- Operations Plan
- Financial Plan
- Exit Strategies
Perhaps the single most important part of the business plan, the executive summary, allows the business owner to capture, in a nutshell, the core essence of what his or her business will be. Think of it as the Reader's Digest version of the full business plan. Understand, too, that it might be all that a credit grantor or potential investor reads before making a decision about meeting with you or investing.
The executive summary should quickly capture the reader's attention and generate excitement. It should focus on the hard facts and should avoid, at all costs, exaggerated optimism or "management speak." The writing of the executive summary, and the entire business plan for that matter, should be void of any words that you wouldn't use when speaking with someone in normal conversation.
Among topics to address in the executive summary are the following:
- what type of company it is
- how it will differ from competitors
- what products/services it will offer the market
- the size of the market and amount of that market share to be captured
- who the management team is and a brief highlight of their qualifications
- how the company will be capitalized
- what that initial or additional capitalization will be used for
- what goals the company hopes to achieve
If a strong summary is written, the remainder of the business plan will be relatively easy to flesh out by using the summary as an outline and providing more details for each relevant section.
Table of Contents
Once you've mapped out your executive summary, you can then lay out the table of contents for your business plan. The table of contents is exactly what its title implies says: an outline of the various sections and their corresponding page numbers. The table of contents should be designed in such a way that someone reviewing your plan can readily access any section with ease.
Most likely, you will probably spend a good deal of time editing and revising your business plan. Once it has been finalized, it is always a good idea to go back and double-check that the sections and pages numbers of your table of contents are still correct.
The Company description is your chance to impress the reader with what will make your business different. Here you highlight the key accomplishments and history of your business to date, how it was started, significant milestones, sales growth, evolution and plans for the future. If your company is a start-up, explain what your vision is for the company and how you hope to achieve it. Another thing to consider in the company description is how you will perform the work. Will you participate in joint venture projects frequently with strategic partners, or will you perform most work yourself? Similarly, to what extent will you rely on subcontractors? These decisions can significantly change the dynamics of both your business and your plans.
This section should also include your company's mission statement. People are often confused about the distinction between a vision and mission statement and often interchange the two. In essence, the mission statement should explain in clear terms what the company is all about and what it does for customers and employees. Here is one example of a contracting company's mission statement: We aim to be a developer's first choice for the building of commercial office plazas in the metro area; to provide our employees with a career offering highly competitive pay, job security and ability to advance with unlimited potential.
A vision statement takes more of an inward focus. It describes what the company aspires to be for its owners and employees. It encompasses your long-term goals for the company and outlines specifics you hope to achieve. For example, Acme Contracting is one of the most profitable construction companies in the metro area, with more than 100 employees, dozens of major projects in progress, a value of $50 plus million and a profit margin of 17 percent.
If you find that over time you achieve what you outlined in your vision statement, congratulations, you've reached a milestone of success and are ready to take your company to another level.
Here you should specifically describe what your company will do. What services will your firm provide? Will you try to do all things for all people (not recommended), or will you focus in on a relatively narrow niche? Try to explain how you will provide your service in a way that is unique.
If your service is routine, there will be many companies offering comparable services to the consumer. The difference from one company to the next is how that service is delivered. Is there a process you have for scoping out the job and ordering the materials that allows you to be more timely, on average, than your competitors? Do you have a foreman or project manager who is very people-oriented and speaks with the customer in a very friendly, down-to-earth way so that they are comfortable with what is going on? Or, you may have a design team that can value engineer a project to the point where it saves the client money, while still making money for your company. These are all facets that could differentiate your company.
It is vital to clearly outline your services because your business plan must serve as your guide. When a job comes up that doesn't clearly fit in with the services you outline in your business plan, that's when you make a strategic decision not to pursue the work. Perhaps the job would involve too large a risk of capital or too big a commitment of your resources. The payoff could be huge, but the risk does not fit in with the profile of your business. This allows you to focus specifically on the type of work that matches your strategy.
The next section of your business plan involves a reasonable amount of research. The Internet, various industry trade publications and word-of-mouth can be your most valuable assets. A market analysis allows you to express to the reader that you have an understanding of the competitive landscape, the market dynamics in play, trends in the market, market growth, barriers to entry, etc.
This research will help you formulate a case for why your company will truly be successful. You may identify that there is sub par competition for contractors that do mid-sized, high-end, private projects, which happen to be your niche. Or, you may unearth information that the city you plan to operate in is going to initiate a bidding process for various projects involving your company's projected specialty.
Following your market analysis, you should address your marketing plan. This is your approach to getting your company out in front of potential customers in the marketplace. Your marketing plan should be specifically targeted to match the services you plan to offer your intended audience. For example, if you are focusing on concrete jobs for smaller residential projects, there would be little point to being involved in a large, regional builders association. Similarly, if you plan to market your services exclusively to major developers in your region, advertising in your local newspaper, while helpful for building your brand, likely would not be very effective in reaching your true customers.
As with any service-based business, you will likely find networking and word-of-mouth to be among your best vehicles for marketing your business. Your market analysis should have discovered where the players in your industry currently reside. Get involved in the business groups where builders and developers meet. Join a committee and become active. In time, you may have an opportunity to sit on the board of a local or regional construction group. Some of your best prospects may come directly from these groups.
Perhaps the group has a monthly newsletter or magazine which could be an excellent vehicle to advertise your firm and your services. Maybe you can take advantage of a public relations opportunity and write an article for the publication based on your expertise, or share a success story about how you helped a client. All of these exercises will put your company and its services in front of potential prospects. With the right mix of activities, and a little persistence, the marketplace will come to know your company and what you have to offer.
This section examines the particulars of how your company will operate to deliver your completed projects. Operations plans are centered on an organization's policies and procedures. A written policies and procedures manual is essential for a company's growth and will enhance an organization's efficiency.
During large growth phases of any company, new employees are constantly being hired or new design teams are coming on board. Invariably, everyone thinks their way is the best way of doing things. Unfortunately this will lead to inefficiencies, and worst of all, mistakes. Any business owner knows mistakes cost money-how much it costs will be dictated by the magnitude of the error and how long it goes undetected. Policies and procedures will dictate how a company bids a job and obtains pricing, procures subcontractors, orders materials, hires employees, transports equipment to jobsites (whether owned or leased), and ultimately, how bills get paid and how the company gets paid.
The key to the enforcement of any policy and procedure is the tone set by management, with zero tolerance for deviation. Operations plans can be tweaked as you grow or change the focus of your business. New employees often bring fresh ideas and diverse ways of carrying out your plans. Alternative methods may be superior to your current system of operations. All policy changes should be implemented globally by the organization, while proper training and implementation schedules are the keys to their success.
The financial part of the business plan comes toward the end of the planning process, once all the great ideas and concepts have been mapped out. This piece is critical to the overall success of the business and for obtaining necessary credit arrangements to establish and sustain funding the business. The financial plan is often the area where contractors need the most assistance.
For many contractors, the analysis of capital requirements and funding sources requires consulting with trusted business advisors who specialize in the construction industry, specifically your CPA, a bank lender and possibly a surety. If your plan includes establishing a bonding program, you need to determine what type of program you need and if you have enough capital to support this program.
Two key questions that must be asked at this stage are: How much money is necessary to initiate operations and sustain the business until it becomes self-sufficient? Where is this money coming from? If you do not personally have the amount of capital required, other sources could include friends and family, taking in a working partner, a silent partner or outside equity financing.
It is critical that you establish a working capital line of credit with a bank to support the delay of collections of requisitions. Interrupting your business in its early stages to locate additional capital will create a serious roadblock to your success.
Another pair of key components to the financial plan are financial projections and budgets. These will serve as the landmarks on your road to business success. A full set of projections includes balance sheets, income statements and cash flow schedules.
Part of your business plan should include the form of business entity that will own this business. All forms (corporations, partnerships, limited liability companies) have their advantages and disadvantages. It is important to determine the best form for your business.
The management structure in a business plan is usually made up of four key positions, and depending on the size of the company, the responsibilities of the positions may be spread over three or less people. Ultimately, when a company reaches certain plateaus, the four key upper management people are the chief executive officer (CEO), chief operating officer (COO), chief financial officer (CFO) and the executive in charge of business development, or for our purposes, the chief sales officer (CSO).
In the early stages of a company's life, the CEO may fill all of these positions. This person is usually the owner of the company, the entrepreneur if you will, and this individual will make all key business decisions. A business plan that is well thought-out will take many of these responsibilities away from the CEO. The CEO's responsibility is to specifically carry out the elements of the plan. He or she is the one "steering" the ship and holds all the other executives and management accountable for the company's performance.
The COO is responsible for making sure the operations plan is being followed. He or she is the enforcer of policy and the individual to go to when something is not getting done. In a construction company, this individual monitors project teams and evaluates and measures their performance. If a project begins to fall behind schedule, a good COO can identify this and put corrective action plans in place to put it back on schedule or negotiate change orders for time and money.
The CFO is the person in charge of the company's finances. This person monitors the financial plan and reports the company's financial performance to the CEO. The CFO must act as the sanity check for operations and must have constant communication with the COO. A good CFO should be able to report potential operational issues before they become a problem. Timely monthly financial monitoring of projects is essential to sound financial risk management. There are countless organizations out there that claim they conduct monthly reporting; the problem is that many are looking at monthly reports that are four months old. The problems that are discovered have now festered for three more months, and mitigating risk or financial loss may now be compromised. The bottom-line is that upper management must have constant communication with one another and with the personnel in charge, or the business plan will fail.
This section of the plan essentially outlines how the owners "cash out". It does not necessarily mean retirement, but it is the first step towards a retirement plan. Many closely held businesses and their owners accumulate a large net worth over time. Unfortunately, this is not like employees socking away money in the company profit sharing plan. A business owner does not have the ability to just close up shop. If this is the plan in place, it will be a long, drawn out process that will erode a great deal of accumulated wealth. Other business owners will say, "My plan is to sell the business." That is a great strategy, but if you don't have a buyer in place when you want to exit the business, you may never be able to retire.
While there are many continuity and succession strategies for closely held businesses, the most common we see is the sale, or "gifting" to the next generation of the family. More thought needs to be used when forming these plans. A plan that one day "junior" will take over will only work if "junior" is qualified to run the business. When dealing with succession and continuity in small businesses, ownership and leadership are often placed in the same category. Owners need to look at who brought the company to its current level of success. Most business owners will find that their upper management team raised the company to its current status. The exit strategy plan should set up both the succession and continuity components. As people are identified for key management roles, incentives should be established in order to retain them. You need full buy-in from your management team and an open line of communication to establish your plan. Whether the company is sold to a third party, the employees or the next generation, the success of the exit strategy will depend on retaining talent.
Over the years, the most successful construction business owners that we have worked with have developed formal, well-defined business plans and have implemented measurement systems that monitor their plan's progress. They use their business plan as a "roadmap" because it contains detailed goals, responsibilities, and pre-defined end results. Their plans are refined periodically to reflect changes related to the economy or new opportunities. More importantly, everyone within the organization understands their individual goals and the goals of the company. With the right "roadmap" in place, your business can be on the road to even greater success.
Construction Business Owner, January 2007