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.
Friday, March 27, 2009
Monday, March 23, 2009
When One Dives, Another Thrives
Dan Miller makes a great point in Whack-a-Mole:
Painting contractors are certainly feeling the pinch of the recession. Home owners are holding on to their money more tightly; construction is down. Add to this the "painters" who are coming out of the woodwork, and it all makes for a difficult situation.
A contractor can overcome this in many different ways. Adding complimentary services, such as pressure washing, deck restoration, or maintenance programs will differentiate your company and help attract customers. Targeting our marketing more effectively can help attract the type of customers we want. Improving our customer service can elevate us above the riff-raff.
Even in tough economic times, opportunities abound. They may not be as easy to spot or exploit, but they still exist.
When one business lags, another explodes. If your business is suffering, what is the counterpart that is thriving? Can you benefit from that? If appliances aren’t selling, then you can be sure appliance repair is up. If new car sales are in the tank, used cars are thriving.
Painting contractors are certainly feeling the pinch of the recession. Home owners are holding on to their money more tightly; construction is down. Add to this the "painters" who are coming out of the woodwork, and it all makes for a difficult situation.
A contractor can overcome this in many different ways. Adding complimentary services, such as pressure washing, deck restoration, or maintenance programs will differentiate your company and help attract customers. Targeting our marketing more effectively can help attract the type of customers we want. Improving our customer service can elevate us above the riff-raff.
Even in tough economic times, opportunities abound. They may not be as easy to spot or exploit, but they still exist.
Tuesday, March 17, 2009
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.
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.
Monday, March 9, 2009
What is the Competition Charging?
A recent thread on Paint Talk gravitated into a comment on figuring out what the competition is charging. In a small way—and a very small way at that—this might have some value. But in general, this is a meaningless exercise.
Let me first address the small way in which this might be helpful. If you need to charge $50 an hour to meet your financial goals, and respectable, quality contractors are charging $25, you might have a problem. This would be good to know, because perhaps you are in the wrong business (or at least the wrong market). But beyond this, which I suspect is rarely the case, there is little value in knowing what the competition charges.
Your pricing should not take your competition into consideration. What they charge has no bearing on what your price should be—your production rates, your costs, and your financial goals are all that matter. If you think it does, then I suggest that you start looking for a job, because you will need to do so sooner or later, and likely sooner.
If your competition is willing to work for $10 an hour net pay, does that mean that you should? If your competition is clueless when it comes to estimating and pricing, does that mean that you should follow their lead? If your competition is slowly going broke, do you really want to emulate them?
Certainly our competition has an impact on our business. If another company offers comparable service and quality for half the price, the consumer will likely go with the lower price. But it is very unlikely—if not impossible—for a company to offer quality work and service at cut-rate prices. Unless of course, they are going broke, which means they won’t be doing this for long.
I regularly bid against guys who are 30% to 50% lower than my price—and I don’t regard them as competition. They don’t offer what I offer. Certainly I lose some jobs to them, but just as often they disqualify themselves with their low price. My target customers are not looking for the low price, and I don’t regard the guys who compete on price as my competition.
The key is to identify who our true competitors are. Is it the cut-rate contractor, or is it the quality contractor? This is ultimately determined by our target market. If your target market is the price shopper, your competition will be the cut-rate contractors. If your target market is the value shopper, you will have much less competition and their prices will be higher than the cut-rate guys.
If you find yourself regularly complaining about cut-rate competition, it may be time to examine your marketing—you are likely attracting the wrong customers. As is often the case, the best place to start when we complain about the competition is to look in the mirror.
Let me first address the small way in which this might be helpful. If you need to charge $50 an hour to meet your financial goals, and respectable, quality contractors are charging $25, you might have a problem. This would be good to know, because perhaps you are in the wrong business (or at least the wrong market). But beyond this, which I suspect is rarely the case, there is little value in knowing what the competition charges.
Your pricing should not take your competition into consideration. What they charge has no bearing on what your price should be—your production rates, your costs, and your financial goals are all that matter. If you think it does, then I suggest that you start looking for a job, because you will need to do so sooner or later, and likely sooner.
If your competition is willing to work for $10 an hour net pay, does that mean that you should? If your competition is clueless when it comes to estimating and pricing, does that mean that you should follow their lead? If your competition is slowly going broke, do you really want to emulate them?
Certainly our competition has an impact on our business. If another company offers comparable service and quality for half the price, the consumer will likely go with the lower price. But it is very unlikely—if not impossible—for a company to offer quality work and service at cut-rate prices. Unless of course, they are going broke, which means they won’t be doing this for long.
I regularly bid against guys who are 30% to 50% lower than my price—and I don’t regard them as competition. They don’t offer what I offer. Certainly I lose some jobs to them, but just as often they disqualify themselves with their low price. My target customers are not looking for the low price, and I don’t regard the guys who compete on price as my competition.
The key is to identify who our true competitors are. Is it the cut-rate contractor, or is it the quality contractor? This is ultimately determined by our target market. If your target market is the price shopper, your competition will be the cut-rate contractors. If your target market is the value shopper, you will have much less competition and their prices will be higher than the cut-rate guys.
If you find yourself regularly complaining about cut-rate competition, it may be time to examine your marketing—you are likely attracting the wrong customers. As is often the case, the best place to start when we complain about the competition is to look in the mirror.
Thursday, March 5, 2009
Benchmarks and the “Going Rate”
It can be very useful to compare numbers with other painting contractors. Doing so provides us with “benchmarks”—targets that we can aim for. For example, if you see that a large number of contractors are spending 5% of their revenues on marketing and you are spending 10%, you have a clue that improvements can be made.
However, these benchmarks are only that. They are not numbers that are absolute or sacrosanct. They provide a comparison by which we can evaluate our own business. But in the end, we must look at our numbers and the causes for them.
Treating benchmarks as an absolute is no different from asking about the “going rate”. The “going rate” syndrome holds that there is some magic number that you must charge, and nothing can be done to alter it. It treats our pricing as if some power dictates what we can charge, and our own actions are irrelevant.
Just as we should not use the prices of other contractors in calculating our own selling price, we should not use their benchmarks. To do so is to ignore the myriad factors and variables that are involved in each of these numbers.
Let us return to the marketing example. Suppose you have been in business for a year (or are trying to market in a new area). Comparing your numbers to those of contractors who have been in business for 20 years and have established themselves in a particular community is a recipe for disaster. Their context is completely different from yours. Their established market presence likely means that they have more name recognition, and therefore do not need to spend as much on marketing.
This is not to dismiss benchmarks. In the above example, the benchmarks show us what is possible—they show us what numbers can be reasonable. And we can then plan accordingly. We can develop a plan to reduce our marketing over a period of years, and identify the specific steps that will allow us to do so while building name recognition.
The “going rate” syndrome can take many forms, but each has the same ultimate cause—the failure to know one’s own numbers. Each tries to use the numbers of other contractors as a guide to one’s own business. In the end, this is not only foolish, it is the road to failure.
However, these benchmarks are only that. They are not numbers that are absolute or sacrosanct. They provide a comparison by which we can evaluate our own business. But in the end, we must look at our numbers and the causes for them.
Treating benchmarks as an absolute is no different from asking about the “going rate”. The “going rate” syndrome holds that there is some magic number that you must charge, and nothing can be done to alter it. It treats our pricing as if some power dictates what we can charge, and our own actions are irrelevant.
Just as we should not use the prices of other contractors in calculating our own selling price, we should not use their benchmarks. To do so is to ignore the myriad factors and variables that are involved in each of these numbers.
Let us return to the marketing example. Suppose you have been in business for a year (or are trying to market in a new area). Comparing your numbers to those of contractors who have been in business for 20 years and have established themselves in a particular community is a recipe for disaster. Their context is completely different from yours. Their established market presence likely means that they have more name recognition, and therefore do not need to spend as much on marketing.
This is not to dismiss benchmarks. In the above example, the benchmarks show us what is possible—they show us what numbers can be reasonable. And we can then plan accordingly. We can develop a plan to reduce our marketing over a period of years, and identify the specific steps that will allow us to do so while building name recognition.
The “going rate” syndrome can take many forms, but each has the same ultimate cause—the failure to know one’s own numbers. Each tries to use the numbers of other contractors as a guide to one’s own business. In the end, this is not only foolish, it is the road to failure.
Monday, March 2, 2009
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.
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.
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