Timothy E. Hull, CR
In the midst of what may arguably be the most significant global event since World War II, economists, politicians, community leaders, and most members of civilized society are struggling to come to grips with what the real fallout of COVID-19 will look like. Despite differing views and philosophical differences, the one thing many agree on is that this is far from over, and the real impact of this event will be felt for a very long time.
With unemployment rates lingering at record high levels, economic stimulus packages coming to an end, and state social distancing restrictions changing daily, how does one even attempt to predict what the future might hold for business? Even Wall Street is sending and receiving mixed signals. The prime lending rate is next to nothing, real estate markets are crazy, consumer spending is up, and nearly every logical economic theory would suggest that the worst is yet to come.
My career in the restoration field started in September of 2002. At that time, I was told the restoration industry was a “recession-proof” business. My observations and experience over the past eighteen years have supported that theory. This is not to suggest, however, that the world of restoration is bulletproof. And, if there was ever a time that may push the limits of that theory, it is now.
Fortunately, most of our clients and colleagues in the industry have done quite well thus far during the pandemic. Some have even thrived and are having the best year in their history. But for some restorers, this event has exploited a weakness in their company, making their position questionable and their life a lot more stressful. When comparing the successful to the unsuccessful, it is obvious how positioning plays a critical role in maintaining growth and solvency during turbulent times.
Let’s explore four ways you can replicate these positive positions and pandemic–proof your business.
In the wake of the 2007-2008 housing crash, contractors and lenders re-learned a valuable lesson—cash is king. Fortunately, this not–so–distant experience seems to have resonated with those in our industry as the cash position of many contractors remains strong. This is no accident, nor should it be moving forward for those who are serious about growing their business.
Building cash reserves does require discipline, which includes managing cash flow in and out of the business. As an example, we need look no further than the early days of being an owner-operator. Young proprietors master the philosophy of what I refer to as “The Homemaker’s Theory of Economics”—you don’t spend it if you don’t have it in the bank. And you always take a part of what you earn and put it in that box in the cupboard above the refrigerator. By applying this philosophy, companies step up their efforts on receivables and place a high degree of attention on payable terms and timing. The combination of the two ensures there is adequate operating capital to meet both short– and long-term obligations.
This is not meant to suggest that debt is bad for the business, especially given times of favorable interest rates like now. Savvy owners and financial managers who appropriately use short-term operating lines of credit can optimize cash flow with these tools. The same can be said for taking advantage of rock–bottom rates for capital purchases. If the business can make more profit from the use of funds than what they would be paying in interest on a loan, they should finance that purchase rather than paying cash. This keeps even more cash in reserves to fund growth and expansion.
Despite what some sales and marketing experts might promote, there is no magic pill or silver bullet that will bring your business endless leads to increase sales. Business development is a very simple equation (EFFORT = RESULT) and the greater the effort, the greater the result. And, by applying the fundamental principle put forth by author Grant Cardone in his book The 10X Rule, business owners can understand the ratio of business development activity to their top–line revenue.
Applying the 10x principle, businesses first need to have a firm grasp of the relationship between their business development activities and sales results under normal circumstances. Generally, this is a combination of marketing activities like the internet, social media, advertising, and marketing campaigns coupled with personal sales activities such as routing, appointments, presentations, professional networking, and more. These can be broadly categorized as points of contact (POC). If the normal ratio of POC to sales is something like 7 to 1 and the market demand drops by 30%, then effort will need to increase by 10 times the decrease to sustain the same level of sales. The resulting change would now be 21 POC necessary to yield the same result.
Professional salespeople understand and embrace this concept. They are gritty in their efforts and respond accordingly when markets become tight. Another way to hedge these events is to increase sales activities when your company is busy. I am a firm believer that the best time to sell is when you are busy. Not only is it easier to get your prospect’s attention, but it also makes those POCs more productive because you have qualified business reasons for visiting your referral sources.
Once reserved for the manufacturing sector, Lean process improvement techniques have now taken center stage in the services sector. In doing so, businesses that have embraced strategies to reduce waste and increase operational efficiency have reaped the benefits of lower operating costs and positioned themselves favorably for times of economic downturn. This is evident when contractors maintain the same gross profit margins even with significant reductions in revenue.
The specifics of these strategies could take exponentially more time to explore than what would be appropriate for this piece. Instead, we can broadly categorize them as waste reduction efforts to bring about more efficient ways of delivering services. Listed below are some examples of these strategies used specifically by restoration contractors whose financial performance has excelled during this most recent period of economic disruption:
The common theme in these observations is to be able to move a project through the process with less effort and time. These productivity gains not only increase bottom–line results, they give contractors greater scalability to adapt to the natural ebb and flow of the business. The ability to maintain profit margins during these cyclical swings gives lean companies one massive advantage over their competitors: greater capacity utilization during surges and catastrophic events.
The impact of this advantage is, in my opinion, tremendously undervalued. When surge events happen, everyone is busy, causing contractors to become overwhelmed with work and operate under the false misconception that they don’t need more business. All the while, their lean competitors are completing many more projects and building reserves against future downturns. The result widens the competitive gap between these companies to a point that is oftentimes insurmountable.
At Violand Management, we believe that successful businesses start with a plan. Whether that is a comprehensive plan like what our clients develop at our annual business planning retreats, or something that was scribbled on the back of a napkin at your local pub, revisiting that plan at regular intervals gives business owners and their managers the opportunity to adjust and adapt when the game changes. This is by far the single greatest commonality amongst companies that have thrived through COVID-19. They all have a plan.
Of course, not all contingencies in business can be planned for. I’m pretty certain there aren’t many business strategists who could have predicted the likelihood or impact of a global virus pandemic, let alone determine how or even if businesses should prepare for such an event. Yet, here we are.
Regardless of your personal beliefs, interpretation of the data, or even predictions for what the future might hold, one thing remains true: the restoration industry has proven to be recession–proof. But staking the claim of being pandemic–proof may require a little more effort.