The country in general, and the construction and remodeling business in particular, is experiencing a slow- down unlike any most of us have seen in our lifetimes. The question, then, is how are you, as a kitchen and bath firm owner, going to deal with it? In my last column, I looked at some of the tools that can be used to determine where you stand from a budget and break-even standpoint.
This month, we will look at some things that will help your business navigate its way through the challenges ahead. The minimum objective will be to survive until the economy recovers. Because, make no mistake: There will be many kitchen and bath firms that will not be around when this is over.
Every business has “leading” indicators of what lies ahead for project sales and revenue. In our business, those things are showroom traffic and floor leads. The level of this kind of activity will indicate what your business will be two to three months down the road.
If your firm requires retainers before engaging in design work, this is an even more telling indicator of what kind of business activity you can expect. It’s likely that you have some statistics on what percentage of retainers turn into actual projects, so a look at the retainers that your designers are working on will give a pretty accurate indication of the projects that will sell in the next couple of months.
Many remodelers have experienced a strong year in 2008 and may, in fact, still be working on a backlog developed during that time. Be careful that you do not let this level of activity lull you into complacency about the future. More than one company has seen its backlog dry up virtually overnight.
Assuming that you conclude that your business is facing a contraction for some extended period, how should you approach this and what are the steps you should consider?
DEALING WITH CHALLENGES
The first thing that you must do is to sit down and completely evaluate the situation and develop a plan for dealing with it. Some questions you will have to answer are: If your budget projections indicate that you will suffer operating losses for several months, how long can you sustain them? How can you reduce operating costs in the short term, as well as the long term?
Begin by reviewing the last full year’s financial statements. The first area to take a hard look at is the revenue and cost of sales area. Since you have concluded that revenues will fall, it’s important that every effort be made to bring down cost of sales in proportion to the expected drop in revenues. If you have people on your payroll working in the field on projects, can some of them be laid off temporarily or permanently terminated? Again, decisions
here will be tempered by how long you expect the downturn in sales to last.
Keep in mind that, as the pace of business slows, there is a tendency for the tasks to expand to fill the work day. There is also a temptation to move your higher paid, supervisory employees into the less skilled positions in order to hang on to them. Since you likely have substantial investments in these employees, this is a reasonable short-term solution, but if project activity does not pick up, this will drive your production costs up and your gross margins down. Keep in mind, too, that your benefit burden on these supervisory personnel is likely much higher than other field employees.
The other category of production costs is the materials you buy from your suppliers. Talk to you vendors, particularly fabricators and subcontractors, about reducing the rates that they’re charging on your projects. Keep in mind that, for them to reduce their prices and stay in business, they must also reduce their costs.
Do not fall into the trap of reducing your margins just to make sales. The impact of even a small decrease in margin will have a significant impact on the amount of revenue needed to break even. For instance, if you normally operate with a 40% gross margin and cut your price by 10%, you would have to increase your sales volume by 33% just to achieve the gross profit to cover the same level of overhead.
The next step is to look at each of your overhead expenses. Here, the largest single item is likely employee compensation and, again, weighing the cost of keeping valuable employees with the necessity of getting your total overhead down presents some difficult decisions. Can you reach the necessary overhead reductions with minimal layoffs and some reductions in pay rates? If so, you may be able to keep some of the key people in your organization.
Are you, as the leader of your organization, willing (and able) to take a significant (20-30%) pay cut? Don’t expect your employees to take reduced pay if you are not willing to.
Next, look at each and every expense. Do not assume that items that may seem to be fixed expenses, such as rents and leases, cannot be renegotiated. Landlords do not want empty space, and many will recognize that some rent is better than none at all. Likewise, no one wants to take leased equipment back.
Finally, consider your equipment and fixed assets, particularly vehicles. Remember that each vehicle requires fuel, licensing and insurance, so eliminating one or two of them will not only bring in cash, but reduce these secondary expenses.
Years ago, during an earlier, tough recession, I was working for an individual who seemed to deal with the tough times without ever seeming to get down about things. I learned two things from this: Hard times do not last forever and a positive attitude is infective.
Your entire organization will take its cue from you. If you have a plan to navigate the current economy and what lies ahead, let your people know what that is and exhibit confidence in that plan. They will respond with confidence and enthusiasm. For those designers and remodelers who can adapt and survive until the turn comes, there will be a bright future. Fear will not get you there, but a good plan and tough leadership just might.