Tightening the Belt

Tough times call for tough decisions, and cutting overhead can be one of the toughest decisions. Operating a business requires certain overhead costs, such as phones, equipment maintenance, advertising, and insurance. If we eliminate, or greatly reduce some of these expenses, we make it increasingly difficult to stay in business.

This can seem like a horrible Catch-22 situation. If we cut these costs, we take significant business risks. If we don’t cut these costs, we risk facing severe cash flow problems. What is a contractor to do?

Now, more than ever, knowing your numbers is crucial. Understanding your cost structure and selling at the right price—that is, a price that is profitable—is the first step. If you aren’t doing these things, almost nothing else matters.

There is no simple answer to this dilemma. Each contractor must assess his particular situation in the context of his business and goals. But it is important to keep long term goals in mind when doing so. For example, saving a few dollars today on advertising may be disastrous in the long term.

The recession isn’t limited to contractor—other businesses are also slowing down. This can be an opportunity to negotiate better rates on advertising, phone service, and other overhead items. As an example, we recently switched our phone service at a savings of more than $150 per month.

If you find yourself needing to trim your overhead, examine your financial statements closely—year to year comparisons can be particularly helpful. They can show where expenses have risen most significantly. Compute the ratio of each expense to revenues—raw numbers are not always helpful when revenues fluctuate. Most of all, develop a plan for dealing with your particular financial situation.

Cash and Spending

If you pay much attention to the media, you will quickly "learn" that many of our economic problems are being caused by consumers spending less. Less consumer spending, the argument goes, means less demand for goods and services. According to this thinking, stimulating spending--in either the private or public spending--will get the economy rolling again. In other words, we need more spending. However, even though the federal government is pumping trillions of dollars into the economy, much of the money is being used to improve balance sheets--that is, saved.

There are several errors in thinking that consumer spending drives the economy. First, it simply isn't true. Say's Law states that supply creates demand. An increase in production results in an increase in demand. Or to put it differently, consumption cannot occur without production.

Another error is that savings are spent. If you put $100 in the bank, that money is subsequently loaned to businesses or individuals. They then spend the money, either on expanding production (in the case of business) or for consumption (in the case of individuals).

As owners of small businesses, we will certainly feel the pinch during this recession. Consumers are spending less, which will translate to fewer leads and less work. If we listen to many of the "experts" we should not be saving money or paying off debt--we should be spending so as to stimulate the economy. But this could be extremely foolish, and ultimately destructive to many individuals.

It is always wise to spend less than you make, to save and invest. That doesn't change when the economy slows.

Speedy Gonzalez

A lot of painters like to brag about how fast they can paint. This would be great if they were in the Painting Olympics, but operating a paint contracting company is not about speed. Or at least is shouldn't be.

Invariably such discussions focus on a small project, like a 10' x 10' room, or a single door. While it may be possible to paint a single room or a single door in an impressive time, this is irrelevant when it comes to estimating a job in the real world.

Let us say that you can paint that 10' x 10' room in 2 hours (actual paint application time) and so you use a production rate of 160 square (320 square feet/ 2) feet per hour for painting walls. If all you ever do is paint 1 10' x 10' room, this might work out. But how many of us operate a business that does nothing but single 10' x 10' rooms?

Most people I know tend to get tired as they do physical labor. Maybe not exhausted, but they do fatigue. And with fatigue our production slows. While we may be able to paint the first room of the day in 2 hours, it may take 2.5 hours to paint the third or fourth room of the day. In other words, our production rates go down.

We must also factor in set up, clean up, moving equipment, and various other tasks. Certainly we could account for all of these separately. But why? Why add 6 or 8 or 10 other line items to your estimate when these items are involved every time you paint a room?

For example, you must lay down a drop cloth, you must remove hardware/ switch plate covers, you must set up a ladder, etc. each time you paint a room. You must clean your brush and roller at the end of the day. All of these tasks are predictable--in both their occurrence and the time they take. Using these tasks as a separate line item when calculating your price is essentially a waste of time. Include them in your production rates.

When we factor in all of these variables, the time to actually paint a room increases significantly. On paper, if someone can paint that 10' x 10' room in 2 hours, he should be able to paint 4 of them in an 8-hour day. But it ain't going to happen. He will be lucky to get 3 rooms painted, which means his actual production rate is going to be 120 square feet per hour. That is a difference of 25%, which means you would be undercharging by 25%.

When calculating production rates, do not use a single, small project as your basis. You will wind up with numbers that might seem reasonable, but simply won't reflect reality. Unless of course, you truly are Speedy Gonzalez.