Contractor Tip of the Month
How Fast Should You Grow?
When a tree stops growing, it dies. If a tree grows too fast, it must be trimmed or it can get top heavy and collapse. It’s a balancing act that nature figures out as it goes. A company is similar to a tree, when you think about it. Your choice is to grow or die – but grow too fast, and die anyway.
Okay, so does your company have the option not to grow? Do you have the option to remain the same size if you are making a comfortable living? Unfortunately, no! The cost of living and inflation creep up daily. It’s been years since any of us has seen a decrease in benefit costs. Couple this with the fact that your employees will not be willing to work for the same wage for several years. If you don’t grow sales to offset those costs, net profit naturally erodes over time.
It is possible to stop growing temporarily by cutting overhead (trimming the branches) to become stronger. However, at some point, you need to start growing your company again. Wait a minute! Like a tree that must be trimmed so the root system can catch up to support it, growing a company too fast without a proper support structure in place most likely will lead your company to collapse as well.
I experienced this first hand. After enjoying success in the masonry and manufacturing businesses, I decided to launch my third company using a more aggressive growth plan. I must have forgotten that it had taken 20 years to build my first company, and the second one was still growing at a reasonable pace after six years. Plus, I was entering into the steel erection business. I knew nothing about the industry, so I had to count on others to manage the erecting steel part of the business for me. Wow, we grew fast. We went from zero to several million in sales in no time. All of the sudden, we had 10 crews setting steel all over Ohio and surrounding states. It was fun growing so fast! At least I thought it was, at the time.
One day, one of our foremen told me the rumor on the street was that we were doing steel work 30 percent under our competition’s cost. My CFO and I started digging to see if the train was on the right track. It turned out that many of the projects our steel erection managers had reported to be 80 percent to 90 percent complete were only 40 percent to 60 percent complete, and our net profit was off by more than $1 million. Talk about embarrassing – but wait, it gets worse.
We discovered we had a million-dollar backlog that would cost us $2 million to complete. Not a fun growth spurt at all! We finished the jobs anyway to keep our reputation intact, losing $2 million during a three-year period. We had grown way too fast without a proper structure to support that growth. Hard lesson learned.
Nowadays, when some wise guy explains to me that he is going to take his company from $2 million to $10 million in sales over a three-year period, I can’t be more passionate in telling him to slow it down and not lose sight of the true net profit. You need to build a support structure before you take on extra work. At Lang Masonry Contractors, if our yearly goal calls for $10 million in sales, we know we must have the following structure in place.
Since each foremen handles an average of $1 million in sales per year, if we are planning to do $10 million in sales, we better have 10 good foremen, access to at least 60 to 80 well-trained field personnel, two good project managers, and a damned good estimator to get us the work at acceptable margins. If we land some bigger work, we may flow additional work through with the same management team, while adding extra field employees. But we’re certainly not going to make that a part of our business plan up front.
You should have your own business plan that calls for manageable growth. Before you grow too fast, make sure you have a structure in place to support that growth or like a tree, your business will die.