December 15, 2009
Manage risk by properly planning for growth
By Robert Kennaley
McLauchlin & Associates
My father, Jack Kennaley, was an accountant. He was a good accountant and a good man. When I started my own construction business, many years ago, he had some advice for me. He told me that good small companies didn’t go under because of bad debts, or because their work was substandard.
Rather, he said, small companies invariably got themselves into trouble because of poor financial management: they didn’t know where they were making money, and where they were losing money. They didn’t understand what they were spending on materials and equipment, or their labour burden. They didn’t properly account for all of their costs in pricing their work, overheads, insurance costs or equipment depreciation. They would price jobs, he would tell me, based on what they thought the market could bear, rather than on a fully informed understanding of what they needed to earn a profit. They didn’t understand the need to know the exact schedule and price points they would need to meet to avoid losing money on a job.
He would also tell me, that small business owners often did not understand that profit was something that should be available to go back into the company. In other words, he told me, I shouldn’t be paying myself with profit. Rather, my income should be considered part of the costs of doing the job, and the company’s profit should be over and above that, so that it is available to help the company grow. Without such profit, he said, my company would never grow to become what he believed it could become.
My father was right, of course. In leaving the construction industry and in developing a construction law practice, we commonly see companies that do good work, but flounder with an inability to grow. With no real understanding of when, if and how they make money, they will lose money on some jobs; sometimes significantly. Without money going back into the company, equipment gets older and there is no money to replace it. They often also lose key employees, as they cannot afford to pay what their experience requires.
There is also a further side effect to this problem. Companies in their early days tend to focus on getting jobs and establishing a client base. There is a tendency to think that other requirements of their business will be addressed later on, once they are more established. They plan on growth, which they believe will then give them the time and ability to delegate tasks and pay attention to other issues. What might be put off until later can include developing proper contracts, establishing occupational health and safety training and policies, dealing with subcontractors or addressing insurance or WSIB concerns. The problem is, they plan to grow, but don’t plan for growth. As such, they never get ahead of the game and struggle to put the time, effort and resources into addressing the many aspects of their business that require their attention, beyond selling and performing jobs.
So what does a contractor do about this? One way or another, contractors and subcontractors, who want to plan for the growth of their businesses, need to learn to develop full and complete budgets. They also must learn to develop full and complete estimates for their jobs, to include for all of their costs, including the owner’s salaries. They need to ensure they know, in a fair bit of detail, where they spend their money, so they may assess where they are making and losing money. They must learn to develop sufficiently detailed schedules for the performance of their work. And within those budgets, estimates and schedules, allocate sufficient time to address non-job-specific requirements, including health and safety training, contract risk management, hiring and firing, WSIB issues, etc.
Some of us may have resources well at hand to help us learn how to do these things. There are, of course, resources available to help those of us who don’t. Landscape Ontario offers seminars and other support mechanisms in that regard. Go to www.horttrades.com/seminars/semdex.php for more information. Community colleges and various levels of government also offer training. Recently, a network has also been established to offer landscape contractors a one-shop source for training, education and support in all of these areas. Geared specifically to the landscape construction industry, more information on The Landscape Management Network can be found online at www.landscapemanagementnetwork.com and LO’s www.horttrades.com website.
Regardless of where you get the help, those of us who don’t know where we are making or losing money, or why we are not growing as we would like, should make sure we have the proper tools to budget, estimate, track costs, schedule and plan for growth. In the end, without these tools, the contracting business can be a little like boxing in the dark. And, like boxing in the dark, it can be risky.
Robert Kennaley practices construction law in Toronto and Simcoe. He speaks and writes regularly across North America. He can be reached for comment at 416- 368-2522, or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.
McLauchlin & Associates
My father, Jack Kennaley, was an accountant. He was a good accountant and a good man. When I started my own construction business, many years ago, he had some advice for me. He told me that good small companies didn’t go under because of bad debts, or because their work was substandard. Rather, he said, small companies invariably got themselves into trouble because of poor financial management: they didn’t know where they were making money, and where they were losing money. They didn’t understand what they were spending on materials and equipment, or their labour burden. They didn’t properly account for all of their costs in pricing their work, overheads, insurance costs or equipment depreciation. They would price jobs, he would tell me, based on what they thought the market could bear, rather than on a fully informed understanding of what they needed to earn a profit. They didn’t understand the need to know the exact schedule and price points they would need to meet to avoid losing money on a job.
He would also tell me, that small business owners often did not understand that profit was something that should be available to go back into the company. In other words, he told me, I shouldn’t be paying myself with profit. Rather, my income should be considered part of the costs of doing the job, and the company’s profit should be over and above that, so that it is available to help the company grow. Without such profit, he said, my company would never grow to become what he believed it could become.
My father was right, of course. In leaving the construction industry and in developing a construction law practice, we commonly see companies that do good work, but flounder with an inability to grow. With no real understanding of when, if and how they make money, they will lose money on some jobs; sometimes significantly. Without money going back into the company, equipment gets older and there is no money to replace it. They often also lose key employees, as they cannot afford to pay what their experience requires.
There is also a further side effect to this problem. Companies in their early days tend to focus on getting jobs and establishing a client base. There is a tendency to think that other requirements of their business will be addressed later on, once they are more established. They plan on growth, which they believe will then give them the time and ability to delegate tasks and pay attention to other issues. What might be put off until later can include developing proper contracts, establishing occupational health and safety training and policies, dealing with subcontractors or addressing insurance or WSIB concerns. The problem is, they plan to grow, but don’t plan for growth. As such, they never get ahead of the game and struggle to put the time, effort and resources into addressing the many aspects of their business that require their attention, beyond selling and performing jobs.
So what does a contractor do about this? One way or another, contractors and subcontractors, who want to plan for the growth of their businesses, need to learn to develop full and complete budgets. They also must learn to develop full and complete estimates for their jobs, to include for all of their costs, including the owner’s salaries. They need to ensure they know, in a fair bit of detail, where they spend their money, so they may assess where they are making and losing money. They must learn to develop sufficiently detailed schedules for the performance of their work. And within those budgets, estimates and schedules, allocate sufficient time to address non-job-specific requirements, including health and safety training, contract risk management, hiring and firing, WSIB issues, etc.
Some of us may have resources well at hand to help us learn how to do these things. There are, of course, resources available to help those of us who don’t. Landscape Ontario offers seminars and other support mechanisms in that regard. Go to www.horttrades.com/seminars/semdex.php for more information. Community colleges and various levels of government also offer training. Recently, a network has also been established to offer landscape contractors a one-shop source for training, education and support in all of these areas. Geared specifically to the landscape construction industry, more information on The Landscape Management Network can be found online at www.landscapemanagementnetwork.com and LO’s www.horttrades.com website.
Regardless of where you get the help, those of us who don’t know where we are making or losing money, or why we are not growing as we would like, should make sure we have the proper tools to budget, estimate, track costs, schedule and plan for growth. In the end, without these tools, the contracting business can be a little like boxing in the dark. And, like boxing in the dark, it can be risky.
Robert Kennaley practices construction law in Toronto and Simcoe. He speaks and writes regularly across North America. He can be reached for comment at 416- 368-2522, or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.