Costly Mistakes During an Economic Boom
authors Shawn McCadden | May 17, 2019
During the recession of 2008, some experienced remodelers reacted much sooner than others with less experience. They did this because they had previously experienced a softening marketplace; they had lived through past recessions.
These remodelers used what they had learned in the past to mitigate many of the potential negative effects that sank other remodeling business owners. I, too, have been through many economic swings during my career as a remodeler and as a remodeling business coach. These experiences, although not fun, provided many lessons learned.
Depending on your business model, market location, and how bad the next recession gets, there could be many potential mistakes. However, the biggest mistake might be to ignore them and their potential impacts on your business. Plus, why go to the lumberyard school of hard knocks when you can learn from the experiences of others? Here is a short list of costly mistakes you could make during the current boom, as well as the eventual bust that would likely follow it.
No. 1: Growth Plans Without a Plan B
I have seen many small and large remodelers and even nationally franchised remodeling companies fail when the remodeling economy crashes. The one thing I found they all had in common was that although they had ambitious and even well-thought growth plans, they had no plans ready for when what they thought was normal went away.
Don’t make this mistake—always have a Plan B for what you will do when the old normal is replaced with a new normal. I say it this way on purpose. A softened economy may become the new normal. Things may and do come back, but it’s a different new normal when it does—never the old one you had assumed would last forever. On the positive side, economic recoveries bring new opportunities with them. If you have a Plan B ready for the downturn, you can watch for and focus on your next opportunity.
No. 2: Adding Overhead You Might Not Be Able to Liquidate or Afford
When business is good and cash is flush, remodelers tend to increase overhead and assets. They move to an out-of-the-home office or upgrade to a larger space. They add equipment and vehicles and take on leases and loan payments for some, as well as other related expenses like insurance, registration, fuel and ongoing maintenance.
Potentially worse, some business owners use reserve funds and/or what they oftentimes falsely assume to be profits to pay cash for these assets. When the economy tanks and the money coming in slows down, these remodelers become challenged to keep paying for these things.
If you have a long-term lease for your office, you may not be able to get out of it. If you have a fleet of newer vehicles or equipment, selling them on Craigslist to create cash might mean that your selling price may not be adequate to settle with your creditors. Even if your landlord lets you out of your lease at that new showroom you just created, you will most likely be leaving much of your new showroom investment to your landlord.
No. 3: Forgetting About Marketing as well as Marketing to Past Customers
When the economy is good, many remodelers slow or even stop their marketing investments. Their thinking is, “Why spend money for more leads when I am already turning away work I cannot produce?” Big mistake.
Yes, perhaps you can slow down lead generation and spending, but marketing should still happen. Keep investing in differentiating your business from all of the commodity contractors out there riding high on the economy while mistakenly gutting their marketing.
If your firm is well known in your marketplace, especially for a particular expertise potential customers want even during a recession, you are likely to be the company of choice, even if your competition hasn’t differentiated themselves like you did.
Don’t forget to keep marketing to your past customers so they are aware of the full breadth of the work types you can do. One of the worst things a remodeler can hear from a past customer during a recession is, “We didn’t know you did that!”
No. 4: Selling a Backlog Without Considering Rising Costs/Expenses
When the economy is humming, there is often opportunity for remodelers to sell a big backlog of work. I get it. A good backlog can provide a level of comfort for a busy business owner. Conversely, a large backlog can also be dangerous whether a recession shows up or the economy keeps humming. If you sell that backlog at a fixed cost and then costs go up, you could have a bunch of work that has already lost money even before you start it.
One option could be speaking with your attorney for help developing a cost-escalation clause for your contract. Another might be to keep your backlog down. I find that full-service remodelers who follow a strategic marketing plan consistently get a steady flow of quality leads. For these remodelers, a six- to eight-week backlog can be maintained by raising prices while the economy and remodeling sales are strong.
Such a strategy not only protects your business from cost increases, it can help generate much higher profits. If your business is the only one still viable because all the other remodelers feasted on lower margins, you can ask for and often get higher prices. QR
McCadden is a speaker, business trainer, columnist and award-winning remodeler with more than 35 years of experience. He can be reached at shawnmccadden.com.