Owners of many companies, both large and small, are facing extreme challenges due to the economic downturn of 2009. While they can’t wish it away, or change the outcome of the presidential election, there are some things business owners can do to maintain solvent in tough times.
Among the things they can control, according to Paul Rauseo, managing director for business consultants George S. May International Co., Park Ridge, IL, is waste. Or, as Rauseo describes it, “Waste, Inc.,” a fictitious personification of bad decision-making and other wasteful practices. Rauseo spoke to ContractingBusiness.com in an exclusive interview, to describe how he and other George S. May consultants help HVAC business owners put a stop to wasteful business practices.
“We’ve seen many HVAC companies that are making money, some that are marginal, and some that are hemorrhaging,” Rauseo explains, “and waste is the common thread that weaves through all of them: wasted products and services, wasted efforts, wasted assets, wasted profits, and wasted business.”
To help contractors root out wasteful practices, Rauseo and other George S. May consultants examine three key areas of every business they visit:
1) The “back office,” which entails purchase orders, receiving, inventory, and vendor receipts.
2) Planning and logistics, which includes dispatching and accounts receivable.
3) Operational management, which comprises customer sites, equipment, project management, and contracts.
“If you address these three areas separately, you’ll begin to see profit at a very low volume,” Rauseo says.
Rauseo believes HVACR business owners — while certainly experts in the industry — often find themselves overwhelmed by the realities of the daily business operation. They get too caught up in the short term details, and lose sight of the big picture - the real role of a business owner.
“When they examine their businesses more closely, many business owners are shocked to learn, not only how much of their resources are wasted, but the real effect waste has on the organization,” Rauseo says.
According to Rauseo, wasteful practices are found in:
• Wasted Assets: human resources (poor employee hand book and job training, inadequate job description/responsibilities, irregular employee evaluation, high turnover, improper record keeping)
• Wasted Profits: finance/accounting (credit losses, refunds, poor budgeting, excessive expenses, slow collections, idle money)
• Wasted Business: sales (neglected customers, uncalled prospective, lack of sales, unsatisfied customers, high pressure tactics, rash promises)
• Wasted Products/Services: operations (unused capacity, wasted labor, poor training and absenteeism, slow work pace, outdated methods/ equipment)
• Wasted Actions: marketing and communications (old marketing plans, ineffective advertising, no publicity, lack of return on investment (ROI) and measurement, uninformed plans about the company, employee communications lacks credibility)
• Wasted Effort: administration (outdated technology, lack of policies and procedures, poor tracking costs and expenses, lost files, inadequate reports, facilities inefficient for operations).
According to Rauseo, a business’s slide can often start with the multiple project bids its managers feel compelled to respond to. Any project will help, they reason, if it “keeps people working,” regardless if the project is three hours from the main office.
“If you don’t get the bid, you still have to pay an estimator. We say that when a bid comes in, it should go to accounts receivable to determine if it meets certain parameters," Rauseo says. "Then, you can decide if you’re going to expend company resources on that bid. When a bid comes in, the contractor should determine first if the company can afford to handle the bid. How many estimators and hours will the bid require?
“Contractors have to button up their leaks and get to the heart of where the waste exists, and the waste starts right at the beginning, which is expending company funds on bids, [for projects] that may never happen,” Rauseo insists.
According to Rauseo, the pace of the economic freefall of the first half of 2009 has slowed. The decline continues, however, and small business owners are scrambling to maintain profits.
“It’s not all doom and gloom out there, and in fact, many companies are continuing to make money in this economy,” says Rauseo. “Now is the time to climb out of the cellar of economic despair and plan for profit. And, there are things you can do to turn your business around.”
Here are Paul Rauseo’s Top 10 tips to help prepare for inevitable slowdowns in these economic times:
1. Don’t panic at the first sign of a slowdown. A downturn in your business can be self-fulfilling because you’ve taken steps to cause it. Keep your receivables under control without impairing your ability to do business.
2. Don’t tie yourself too closely to one customer. While it is important to have key customers you can rely on, you don’t want to be so restricted that the loss of one or two damages your business beyond repair. Look cautiously for ways to expand.
3. Get the money. Many companies do not realize it, but they are, in effect, bankers to slow-paying customers. Compensating for slow-paying customers dramatically affects profitability. Change your attitude; get the money.
4. Convert your costs to variables. The fewer fixed costs you have, the less you can be hurt by a downturn. Look for ways to farm out some of your fixed costs, there is an alternative for almost everything.
5. Keep your inventory to a minimum. Inventory is another fixed cost. When possible, aim for just-in-time manufacturing.
6. Be the low-cost producer. If you aren’t the low cost producer, you likely won’t have sufficient profit margin to expand. If you’re spending more on something than your competitors, find out why and take steps to avoid paying more.
7. Don’t tie yourself to one locale. There always are markets and industries that do fine in a down turn. Broadening your customer base will help you survive.
8. Listen to the experts. Keep in touch with your bankers. They see the clues, such as an increase in past-due loans, and can let you know when the money supply is shrinking. Your vendors are another good source of information.
9. Don’t grow too fast. Rapid growth is a leading cause of small business failure. Take a sober look at your business and examine the reasons for growth. The best too to schedule growth is a five-year plan and constantly monitor costs and anticipate trends.
10. Negotiate for services. When times are bad, everyone is working harder to generate business. Don’t be afraid to ask for a better price. Just as you want to please your customers, these professionals want to keep your business.
About George S. May International Company
George S. May International Company is one of the most established management consulting firms in the U.S. Since 1925, it has been helping business owners improve their operations, profits, efficiency and effectiveness. The company is headquartered in Park Ridge, IL. For more information visit www.georgesmay.com.