School of Management: Business in a Cautious Economy

Operating a business in a cautious economy is very similar to operating a business in a normal economy, pointed out Jim Huston at the Lawn & Landscape School of Management, Ft. Lauderdale, Fla.

“At any given time, you can have two companies with the same client base, revenue, etc.,” said Huston, president, J.R. Huston Enterprises, Englewood, Colo. “And one will always be making a ton of money while the other is losing a ton of money.”

The reason is usually poor management and organization, among a list of other basic business practices, Huston said. “Whether you’re doing good or bad, it’s not because of the national economy – it’s because of the way the company is working.”

But there is something the companies that are doing well have in common – excellent production.

“You are not dependent on the circumstances around you,” Huston explained. “You have to maximize productivity and minimize costs – do this in any economy and you can be a successful company.”

With an objective to maximize revenue, maximize productivity and minimize costs, Huston pointed out five focus areas for contractors:

Huston also touched on marketing and estimating strategies in a cautious economy.

When marketing and estimating, there are five key spotlight methods – product, place, price, promotion and process, being the most important. Process involves the way a company’s employees complete tasks. “As an organization grows, you have to make processes tangible and familiarize them with employees so they can follow them,” Huston said. “Creating standard operating procedures is the most boring thing to do, but is also one of the best things to do. Companies that are doing well are practicing and rehearsing a lot – they go over things repeatedly and develop processes.”

With estimating, a critical aspect businesses should focus on is the break-even point, which is total direct costs plus general administrative overhead, Huston advised. And in a cautious economy, understanding gross profit margin also is vital. “Gross profit margin is the best indicator of what’s happening in your market,” he said. “For instance, on a $10,000 installation project, $3,000 to $4,000 is typically gross profit margin. On a small project, gross profit margin is usually in the mid to high 30-percent range. On larger projects more than $100,000, the gross profit margin is usually in the low 30-percent range. In a bad economy, gross profit margin will drop like a rocket to the 20-percent range.

“For commercial work, it’s usually a little lower than that even,” Huston continued. “Gross profit margin on commercial work is typically 25 percent and then drops to the mid to high teens in a bad economy.”

Contractors also should focus on recovering overhead in their estimating.

“Overhead makes up 20 to 25 percent of sales – it’s the largest cost contractors have, and they have to recover that in bids,” Huston emphasized.
Huston’s final point was to encourage contractors to form a project/priority worksheet and a project/new idea board. Each of these tools can be used to track and prioritize ideas and keep them top of mind when contractors return to work and are trying to plan goals for the year.

The author is Managing Editor of Lawn & Landscape magazine and can be reached at nwisniewski@lawnandlandscape.com.