Lesson from the Great Recession: Working for Narrow Profit Margins Can Cause a Business to Fail
Throughout the years of business, we have all made mistakes. Just like when I get together with friends, and one of us makes a mistake. Something happens, like throwing an eight-inch block in the back of your truck when there is a spade shovel laying in there, and you pay the price coming from the shovel handle to your head. During those times, one of my friends (we call him Rat) always asks, "Did you learn anything?" Well, since most of us have taken a pretty good beating during the Great Recession, I would like to ask the same question, "Did you learn anything?"
The thing the Great Recession taught us is that the companies that were working on narrow margins when the economy was good were quickly working at a loss when the economy got tight. This caused several low-margin bidders to close their doors. The economy remains like a new born elk: A calf's first stand is all wobbly and unsteady. This isn't over yet, as some contractors are still playing the same low-margin game expecting to get different results. It won't happen.
Speaking of elk, I just got back from an elk hunting trip in New Mexico with four friends, including two doctors, one lawyer who is now a judge, an accountant who has three offices with hundreds of clients, and me. Sounds like the beginning of good joke, doesn't it? This is no joke. Over a few drinks and a Texas Hold'em game, we were discussing how hard it is to make a living these days.
I thought only contractors had hard times. One of the doctors explained how potential lawsuits had driven up the costs of liability insurance to the point that he decided to sell his local practice and go to work for a hospital, where they were under an umbrella. The other doctor, who is a surgeon, explained how a knee surgery that paid $4,000 20 years ago must be done for around $1,200 today. It reminded me of the masonry trade and how we are laying block per piece today cheaper than we could get to lay them 20 years ago. He said he was lucky he does not have to work for those slim margins as if he could not get a fair price to do the work, he had saved up enough that he could retire if he wanted.
Then, the accountant chirped in and said, "You know, it is unbelievable how all businesses are just hanging on for dear life. They work on such slim margins that they are all just one bad deal from going bankrupt!" I told him I could resonate with that as my bonding agent used to tell me when I would ask for a bigger bond than he wanted to write, that contractors are all just one bad job away from going out of business.
The interesting thing of the conversation at hunting camp was that all my friends had gone through pricing pressures and tough times in their industries, and they all made changes accordingly. Both doctors went to work at hospitals, the attorney ran and became a judge, and the accountant went to different cities to find a different clientele than he could get in our local town. All are prospering today, due to the courage they had to make those changes.
Statistics show that more contractors go out of business when the economy is coming back than during the recession. That's due to the cash requirements it takes to fund future projects. Instead of taking on low-margin/high-risk business, like my friends, don't be afraid to make a change. If you do less volume on low-risk/high-margin business, you save the risk of running out of cash in the process. There will be a time when opportunity presents itself, and you can grow again. In most areas of the country, pricing pressures do not allow us to take on extra work right now.
Next month, we will talk about building your treasure chest for when your company goes through a rough stretch. Stay tuned!