Downturn Made Contractors Stronger
Originally published: 02.01.10 by Ruth King
Those that cut costs and communicated well with key customers did the best.
I look at financial statements everyday. By the end of 2009, I noticeds ome similarities for the contractors that survived — and even thrived — in this economy.
Here are five trends that I observed in 2009:
1. Sales volume was down more than profits.
Despite lower sales, the bottom lineremained constant or dropped just a little. Contractors cut overhead and nonessential spending. The good ones did not cut their marketing and advertising budget. Many did allocate it differently.They invested their precious dollars contacting existing customers (those customers who have bought from their company) through direct mail, email,and other personal methods rather than spending money on suspects (thosepeople who aren’t even prospects to buy) with radio, television, and print ads. Contractors took a hard look at every overhead expense and determined what they could cut … and cut they did.
2. Many paid off debt.
This was seen in the decrease in long termdebt-to-equity ratio (long- term liabilities divided by equity or net worth).Part of the reason could be that contractors didn’t purchase new trucks. Better yet, they were prudent with the cash that they did spend (or invest
3. Employees were much more productive in 2009 than 2008.
Contractors shed non-productive employees. I heard many, many comments like this one: “We’re getting as much work done with three office employees as we did with four.” Nonproductive field personnel also went through “career readjustmen tprograms.” I saw less unapplied time and more billable time.This was seen in the percentage compensation ratio (total payroll plus payroll taxes divided by sales). Despite the lower— on average — sales, the percentage compensation ratios didn’t go up. This means greater productivity as a percentage of sales. Service technicians and sales peopledid a much better job educating the customer about the need for specific products that would make them more comfortable in their homes. They did proper diagnostics and wrote everything on their invoices. As a result, they had higher average ticket prices in 2009 than they did in 2008. This also kept contractors’ percentage compensationratio lower.
4. Maintenance agreement renewal rates didn’t decrease.
I would have expected that in tougher economic times, renewal rates would have significantly decreased. They didn’t. Most decreases were under 5%.Many, many contractors increased the number of planned maintenance agreements.I started looking at why. Here are a few reasons: Those companies thathave good planned maintenance agreementprograms have engendered trust.They’ve educated their customers about their benefits. And, some bill monthly rather than annually.
5. The $1,500 tax credit and manufacturer/utility rebates helped increase sales.
The credit and rebates gave customersreasons to buy. Many got “bargains”they would have never seen in good economic times. These incentives helped contractors generate revenues that were higher than they would have been without the incentives. The contractors kept all of the good sales people. The non-productive ones,those whose closing ratios were low or those who wouldn’t/couldn’t generate some of their own leads, also fell victim to the “career readjustment program.”My perspective is that every good sales person was working in 2009. The bad ones were looking for jobs.
Bottom line for 2010:
1. Keep your employees productive; becareful when hiring sales people. Thegood ones still have jobs and aren’tlooking for work.
2. Keep marketing. Change your mixto contact current customers ratherthan suspects.
3. Grow your maintenance agreementprogram.
4. Educate your customers.
5. Prudently invest your cash/take ondebt for needed assets.
Ruth King has over 25 years of experiencein the hvacr industry and has workedwith contractors, distributors, andmanufacturers to help grow their companiesand to become more profitable. She ispresident of HVAC Channel TV and holds aClass ll (unrestricted) contractors license inGeorgia. Ruth has authored two books:The Ugly Truth about Small Business andThe Ugly Truth about Managing People.Contact Ruth at www.hvacchannel.com or770-729-0258.
Articles by Ruth King
Understand Your P&L Statement: Gross Margin
Understand Your P&L Statement: Cost of Goods Sold
However you decide to categorize expenses in your P&L, it's important to be consistent.
Understand Your P&L Statement: Sales vs. Revenue
Sales are critical to survival — when revenue is actually generated is even more critical.
The 20 Percent Profit Myth
For a realistic goal, include owners’ compensation in the net profit equation.
Rethink Your Bonus Strategy
Enact a profit sharing program, rather than a bonus entitlement.