Take the Proper Steps So You Can Enjoy 2011
February 28, 2011
We anticipated that during the first part of 2011, business would be slow. The new residential construction market is still down over 70 percent from its peak. With new reports that nearly 25 percent of the home mortgages are larger than the value of the home, it is likely that we are probably another year from beginning a real turn around in that market. Commercial construction, according to many in the business, may not even bottom out until early in 2012. Contractors to whom I have spoken say that their customers are still feeling the effects of the economy, with most not wanting to spend money on large “non-exciting” purchases like furnaces and air conditioners.
TAX CREDITSOf course, these issues were lessened somewhat, the latter part of 2010, by the $1,500 tax credit and the acknowledgement that it was definitely going to end. Unfortunately, the extra business which that tax credit provided for us the end of 2010 has now served to reduce our business in the new year. This is much like what the automotive industry found when the “Cash for Clunkers” program came to an end. During a program like this, certain “on the fence” buyers will be encouraged to make a purchase. But just as certain, right after the end of a program, buyers don’t want to buy, knowing that they missed out on the program. So there is naturally a lull period before the market returns to normal. We can only hope that in this case the lull period will be short.
The weather over many parts of the country, with record ice and snow, has made it difficult to handle those emergency calls that have come in. That same weather has often reduced the desire of homeowners to make ancillary purchases, such as air cleaners and humidifiers. We can only hope that since the need will still be there, when things thaw out and people know that everyone can move around that type of work will return to its normal pace.
So with all of these issues, we certainly have our hands full making a success out of this year. Now comes the real bomb - despite all of the other issues we are facing trying to make ends meet, our vendors are coming to us asking for price increases on equipment and materials. This makes our challenge even greater. It’s hard to get even your normal price when there are x number of other hungry contractors fighting to get the job. And now you have to raise your prices.
I know that this puts you, and me, in a bad position. However, I have two important pieces of advice to offer you as you deal with these difficult times.
The first is this: whether it be at times like this or any time, make sure that you properly account for your true costs when bidding on a project. Besides the need to make sure you properly account for any equipment, material, and labor costs, make sure that you are properly factoring in your overhead now as well. Remember, as your saleable hours go down, it is unlikely your overhead will go down as fast; therefore your hourly overhead cost will increase. That’s right, when work gets slow and contractors want to lower their prices, they are hurting themselves twice because their total costs, including overhead, are greater when they are doing less business.
The second very important thing to watch is cash flow. Lack of cash is typically the No. 1 reason contracting businesses fail. You need to work extra hard to collect your accounts receivable; reduce inventories, or make arrangements for extended billing terms. The key to remember is that when you have less work to do, and much of that work is marginally profitable work, there is not extra cash coming in to help carry the business.
We remain optimistic that 2011 can be a good year. However, if we don’t take the proper steps and make sure that we are charging properly to cover our costs, and even more importantly making sure that we are collecting the cash on the jobs we do perform, we won’t be around to enjoy the rest of that good year.
Publication date: 02/28/2011