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Contractor Tip of the Month
When the Tide goes Down, You Find out who is Swimming Without Clothes On!
Warren Buffett got it right. And may I add, it isn’t always pretty. When the economy is good, it seems anyone can run a business. However, when the economy sinks and the waters get rough, only the strongest survive. During slow economic times, businesses that have offered themselves to limited markets or were working on narrow margins during the good times, begin to fall like rocks off a cliff.
In 2007, EZ Grout (the manufacturing side of our business) was coming off a nine-year stretch of 35 percent growth going from zero to $10 million in sales – just long enough to get us excited. Then, feeling there was no end to the good times, we decided to invest millions in a major factory expansion and new equipment betting the rate of growth would continue. Anyone who knows me or has read me knows that I believe you can’t do business without taking risk. I bought a 75-acre industrial complex that had several buildings on it and remodeled one of the largest ones. We moved into the new 600- x 105-foot-wide manufacturing facility in January 2008, an ocean of risk to say the least.
I remember our engineer sitting in a planning meeting, saying, “If we make it through 2008 and 2009, we will survive whatever is thrown at us after that!” We had no idea what was on the other side of the mountain we were climbing. We would enter into the biggest recession since the great depression. I would have had to been alive in 1929 to make a worse timing decision on when to build for expansion. Wow, instead of doing the $14 million in sales we had planned in 2008 and $20 million in 2009, sales in 2009 would only hit $3.5 million. We were caught swimming without our clothes on.
In the midst of it all, a couple of near fatal mistakes were made. 1) While we were growing like crazy, we were settling for narrow profit margins, thinking that the growth alone would increase our net income. Big mistake! Doing the extra sales required extra overhead and infrastructure. Then, when the tide went down, the lower sales would in no way feed the overhead elephant we had built. 2) We were catering to only one customer base, mason contractors. Since most mason contractors took a hit during the slow period, they stopped buying, which lead to our tremendous drop in sales.
What saved us were the things we had in place to avoid losing it all. 1) We were diversified with a masonry company that was doing well during the same period the manufacturing side was bleeding like a pig with its throat cut. 2) I had listened to my father’s preaching about saving for the hard times. Therefore, I had built a treasure chest. I always referred to this treasure chest as the million-dollar club to my top staff (a topic for the next contractor tip). I would tell them, if we get in trouble, we could club our way out. The money I had saved for the hard times bought us some time to reinvent the manufacturing company. Eventually, we adapted our manufacturing to the medical, industrial and shop work industries. Today, our manufacturing side does 50 percent of its sales to industries outside of the masonry industry. Now, should the masonry industry take another hit and the tide goes down, we won’t be exposed like the last time.
The moral of this story: Don’t build your company on slim profits thinking that volume will fix net profit. Sooner or later, the narrow margins will lead to you coming up short on cash! Also, don’t work for only one customer as when that customers buying habits change, you will be caught swimming without your clothes on.