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Managing Your Companys Growth

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By Phil Britt

In 1993, Color Landscapes, Mebane, North Carolina, was formed with one old pickup truck and one employee, the founder, Michael Dickey. In 1995, because of tremendous growth, Color Landscapes incorporated. Today, Color Landscapes, Inc., has eleven trucks, twenty employees and over the last eight years, has generated more than $3,500,000 in sales.

Its a story of successful growth. But for every story of successful growth, there are plenty of examples of unsuccessful growth. Either the company grew too slow to meet rising costs, or grew too fast and fell victim to cash flow and other problems.
Managing growth is critical to a landscape contractors success, Dickey says. For example, after ten years of steady growth, his firm is planning to level off this year and to prepare for the next stage of expansion.

Ive reinvested everything into the company for the last ten years; now its time to recoup some of the benefits, says Dickey, who adds that he underpaid himself for several years in order to reinvest in his company and grow it.

Yet Dickey or any other landscape contractor who wants to expand successfully cant just add jobs for the sake of growth, says avid Minor, a former successful landscape contractor who teaches entrepreneurship at Texas Christian University. Minor founded his own company in 1980. The firm grew to 300 employees by the time he sold it for an undisclosed sum in 1998.

You have to be able to determine how profitable a job is. You need to have the right infrastructure in place, Minor says. The right infrastructure includes methods to determine the profitability of different types of jobs, the revenues and expenses of different types of work (maintenance vs. installation), the right financing arrangements and the right management team, to name a few.

If the landscape contractor doesnt know the profitability of the different types of jobs, then he might take on too many narrowly profitable (or even unprofitable) jobs, leaving him short of people or equipment to handle jobs that offer better profits when they come along.

Too many landscape contractors try to improve their top line (revenues) before improving their bottom lines (revenues minus expenses, or profits), Minor says. So, control costs before trying to grow revenue, or the revenues may not come down to the bottom line.

For example, a maintenance contractor probably wants to get all the business he can out of one geographic area before moving to another, which adds expenses in terms of transportation time and costs. By keeping transportation time and costs in check, the landscape contractor can better maximize his profitability.

There may not be enough untapped business to expand profitably. One crew and a handful of equipment can physically do only so many jobs. It might take several additional jobs before adding new equipment and personnel makes sense.

For example, one crew with current equipment might be able to handle ten jobs in a day. The contractor might know of another job, but in order to handle it, he needs more crew and equipment. Yet it takes five of these jobs to break even on his additional fixed costs, costs that stay the same whether he has one additional job or ten.
He has a few choices. He can decline the work or he can take the additional job and lose money on it. If he does a good enough job, he may lose money for only a month or two before he picks up additional work to not only cover his costs, but also to turn a profit. If, after a pre-designated amount of time, the contractor doesnt pick up the additional work, it might be time to get rid of the additional crew and use the equipment for a spare. The landscape contractor may want to try the expansion again, after he determines why it failed the first time.

Similarly, some contractors mistakenly think the road to profitability is to expand from the landscape construction business into another (i.e., adding landscape maintenance.)

While some landscape contractors, like Dickey, handle both types of jobs, others dont have any experience
to expand successfully into another line of business, says Minor.

The bidding strategy, costs, management, are all different, Minor explains. With landscape installation, theres no recurring revenue and the margins are lower. There are a lot of other differences, too.

Dickey knows that. Thats why he has one manager in charge of maintenance jobs and another in charge of installation work. Hes looking for an irrigation manager before expanding into that line of work. Color Landscapes has some irrigation expertise and does some of that type of work right now, however, Dickey wont expand totally until he finds the right irrigation manager.

The right person supports a whole crew, says Dickey, who credits hiring the right people as one of the critical factors in managing growth. Some entrepreneurs, be they landscape contractors, electrical contractors or plumbing contractors, have a hard time relinquishing control, so the growth of their business will be severely limited, if they dont learn how to delegate authority.

While the attitude of some entrepreneurs is that they want to be involved in everything, Dickey says hes just the opposite he wants to give away as much control as possible. He admits that such an approach has its own potential drawbacks.

Weve had people make some [management] mistakes, Dickey says, but once they make them, hopefully, they dont make them again.

Cash Flow Concerns
Even if the landscape contractor has a good handle on profitability and has the right people, he can still grow too fast, which can be the death of a business. Why? The company has to pay for equipment, personnel and other overhead before getting paid itself.
A maintenance contractor may need to pay a crew every two weeks (or every week), but may get paid himself by property management companies every thirty days. If the property management company has its own cash troubles particularly if its a large company, it may delay payment even further. If the landscape contractor wants to continue to work, he still has to pay wages, electric, gas and other bills in a timely manner, even if he doesnt get paid on time himself.

There are a couple of different ways to handle this cash flow crunch. Dickey says he has established excellent relationships with many of his suppliers. Therefore, they wont charge high interest rates, cancel his account or repossess products if hes occasionally a few days late with payments. Of course, those relationships will deteriorate if Dickey is too late too often.

Minor suggests developing two budgets one that includes receivables and payables, and a cash flow budget that takes into account when the landscape contractor needs to make purchases and when he can reasonably expect to be paid.

For example, experience might show that the landscape contractor might have to spend $8,000 in April to earn $10,0000 and to spend $12,000 in May to earn $15,000. But the first $10,000 may not be received for thirty days. Furthermore, the contractors experience shows that only seventy percent of the receivables will be received in thirty days, with the other thirty percent ($3,000) received in sixty days. Therefore, even though the landscape contractor made $10,000 in April, he has only $7,000 in May to meet his $12,000 in spending needs. He might be able to delay payment of $2,000, but that still leaves him $3,000 short.

Receivables should be kept to a minimum. If a regular customer who was paying in thirty days starts paying in sixty days, it could be a sign that the customer will eventually stop paying altogether. Dickey recommends building good relationships with customers to keep receivables as low as possible.

Minor recommends getting a line of credit at the local bank to make up the difference between current spending needs and cash on hand. A line of credit has many advantages over a loan for short-term needs. A credit line gives the contractor more control over when he borrows the money, how much he borrows and when he pays it back.

He can access a line of credit as he needs the money and can repay it as cash allows. The borrower pays interest only on the outstanding amount. So he can take out $3,000 of a $10,000 credit line to meet a thirty-day need, pay interest on it for that amount of time, pay it back, then borrow again. Then he can borrow again say in six months, for thirty days then pay that amount back with interest. He can pay back a portion of the amount accessed when he has the money to do so.

So he might pay back $1,000 in ten days, another $1,000 in twenty days and the final $1,000 in thirty days. Hell pay interest on $1,000 for thirty days, $2,000 for twenty days and $1,000 for ten days. On the other hand, with a $10,000 loan, the contractor pays interest on the entire amount, whether or not he uses all of it. He may or may not be able to save interest by prepaying the loan. Even if prepayments are allowed, there are restrictions on the amount of interest he can save by paying early.
With the money on hand, even if he doesnt need it, theres the temptation to use the entire amount, which can lead to poor spending decisions.

In the same vein, Dickey recommends that the line of credit only be used to meet cash flow needs, not to buy equipment or frivolous items.

Interest rates are at their lowest levels in years, so loans with fixed rates make more sense for equipment purchases. Credit lines, which have variable rates that will increase when overall rates do (as they are likely to), are likely to result in overall higher interest rates over the long term. Additionally, if the landscape contractor uses the line for an equipment purchase, he no longer has access to that money for short-term needs.

One of the reasons Dickey is leveling off this year is that hes tired of running around to suppliers and the bank on Wednesday to meet payroll on Friday.

Im maturing as a businessman, Dickey says. You need to level off every once in a while to get ready for your next stage of growth.

To prepare for the next stage means further strategic planning, new financing arrangements and adjusting personnel (i.e., hiring an irrigation manager or a receptionist) to meet the needs of a larger company.

Strategic planning will include updated budgets and cash flow forecasts, marketing, purchasing and other details. The longer history of success one has in the business, the better interest rate and larger amount of credit (credit line or actual loan) for which a landscape contractor can qualify. Additional inside and outside people might be needed to handle additional work.

March 2003


 
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