Are You in No Man’s Land?
Originally published: 11.01.15 by Ruth King
No Man's Land is one of the most challenging areas of an HVAC contractor's business. This is the area where your profits drop because you have to add overhead to sustain your revenue levels.
There are actually two levels of No Man's Land for service and replacement contractors — the first is between $600,000/$800,000 to about $1,200,000 in revenues. The second is between $2,500,000/$3,500,000 to about $5,000,000 in revenues.
These revenue levels do not apply to new construction contracting businesses.
This month, let's focus on the first level of No Man's Land./p>
Below $600,000 in revenue, contractors can manage the business "in their head." You can do all phases of your business with minimal help in the office and in the field.
Once your business grows above $600,000 it starts being difficult to control all aspects of the business. Once you reach $1,000,000 in revenues, you're really feeling the pain. You feel like you're losing control and don't have a handle on what is going on any more.
As you go through this stage, you realize you're not making as much money as you did when your business was smaller and you may long for the "good old days."
This is the part of the growth cycle I call the first No Man's Land. It's where the overhead is necessary to support the people operating the business, but the overhead really can't be justified because it puts a large drain on profits.
You must change how you're operating your business. You can't be totally hands-on and you can't run the business by yourself any longer. You need sales people, senior service technicians, dispatchers, inventory control and others to help handle the day-to-day operations of the business.
It's at this point that you MUST learn to run the business, including the financial side (which is normally foreign to you), if you want to survive.
There are three options at this stage. The first is to grow beyond this revenue level (which most contractors try to do). Many change their mix of business, focus really hard on maintenance agreements and/or start adding commercial work because it evens out the seasonality of the business. If they don't have the technical expertise to do commercial work, however, this can kill the business through warranty expenses and non-paid work.
The second option is to go back to being small. Most don't like this option because it forces them back into running the business from their home and working for wages again.
The third option is to sell the business because they don't want to become managers, or are not good at it, and prefer to do the technical part of the business only.
Most contractors choose to grow out of No Man's Land. Once you break through the $1,200,000 in sales, you will start earning more profits again because the overhead remains about the same while the sales volume increases by 50 to 75 percent.
Once you make the decision to grow out of it, there are a lot of issues to deal with — mainly focused on getting and keeping customers and employees. You're now using your head as well as your hands to be profitable.
In this stage, you learn about accurate financial statements and how to productively manage your employees.
Advertising and marketing becomes important. You test the waters with many direct mail, social media, and traditional advertising avenues. Track the effectiveness of your activities to determine what is best for your company.
To grow out of this stage of No Man's Land, procedures must be put in place. Discipline becomes an issue if people don't or won't follow the procedures. It's difficult to fire people who are not performing because the attitude is "I need him/her."
Inventory can kill your business. You rent enough space for growth but, unfortunately, employees love to fill that space (in the building and on their trucks). Without close inventory control, your hard earned cash is wasted rather than used wisely for growth and survival.
Cash management is critical. There is a lot of overhead in relation to sales so billing/collecting must be closely monitored, inventory monitored, and productivity on jobs and service calls must be maximized to earn profitable sales that turn into positive cash.
A good maintenance agreement program is a critical element to grow out of No Man's Land. Maintenance agreements provide the cash needed to survive and grow (as well as a loyal customer base).
No Man's Land is a vulnerable stage in your business growth. Many contractors don't make it out of this stage because they can't make the transition from doing to managing and they don't keep an eye on cash flow.
Ruth King is president of HVAC Channel TV and holds a Class II (unrestricted) contractors license in Georgia. She has more than 25 years of experience in the HVACR industry, working with contractors, distributors and manufacturers to help grow their companies and make them profitable. Contact her at email@example.com or call 770-729-0258.