Archive for March, 2009

Runway – a new definition for an old word!

The old definition – a path or a roadway over which something runs – has been updated for the times to mean: the length of time your company has until it runs out of cash.  Jason Calacanis, a successful geek entrepreneur (and I use that word with all due respect)  said the following:

“You need to figure out your runway immediately. This is really easy to
calculate: you look at how much cash you burn every month and divide
that into how much cash you have in the bank. Your accountant can do
this for you or you can simply look at your P&L and bank statement.

Once you know how many months you’ve got left, you’ve got to do the
hard work of trying to extend it by at least 1/4. This means cutting
staff, negotiating with your landlord and cutting any and all
recurring bills. You then need to look at your revenue streams and
figure out if you can double them. In most cases, if you do these two
simple things, you will have increased your runway by 50-100%.
If you double your runway, your chances of figuring out what your business
actually is will go up exponentially.

You also need to do a monthly P&L review with your management team.
Look at every single recurring cost you have and figure out how to cut
it. In an up market, this level of obsessiveness is often wasteful,
because you’re in a race to take market-share. In the case of MySpace
vs. Friendster vs. Facebook all having unlimited funds for a period of
time, this makes total sense. Why worry about $100,000 in server costs
if you’re racing to see who gets bought for a billion dollars first?
However, this is not that time. You have to change your style.
There are times to hit the gas and there are times to conserve your gas.”

So do you have enough cash to ride out the next 6 to 9 months until things turn around, assuming that’s the period of time in which thing do turn around?  If not, what where will it come from?  Or what are your alternatives?

Read the entire article at http://calacanis.com/?s=runway

Read more Jason Calacanis at http://calacanis.com/2008/09/29/the-startup-depression/

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Business Decline of 33% – How’s Yours?

I’ve been speculating for the past few months — not with stocks or bonds, not with gold or guns but with a projection for the remodeling industry.  Make that “my remodeling industry”.  There are many remodelers who fly ‘under the radar’ and with whom I have little or no contact – they don’t join the groups I join: Remodelers Advantage, NARI, NAHB, NKBA or the much-loved Splinter Group in Berkeley, CA.  They don’t attend the trade shows I speak at or attend:  JLC, The Remodeling Show.  And except for the remarkably active blogs on The Journal of Light Construction website, they don’t comment much on the blogs I write – either this one or that of Remodeling Magazine.  In a word, we don’t know one another.  So these aren’t members of “my remodeling industry”.

Members of “my remodeling industry” (and remember this is an industry made up of many, many members each of which – even the largest – accounts for a very small % of total overall remodeling $ spent in their marketplace) tend to be interested in running a full-blown stage 3 (at least) business as opposed to a craftsman shop, they’re primarily selling and managing the company, they know their numbers pretty well and they usually have an office outside the home.  Many of them have been quoted in Remodeling Magazine and a goodly number have been well-photographed on the magazine’s cover.

And many of these great people are in trouble, trouble I don’t even know about because we haven’t talked for a few months.  But I can tell you this, they’re not spending money with me.  My business has declined 33% for the first three months of this year over the same time last year.  If the recession began in December 2007, most of us didn’t even start to take it seriously till, at best, late spring of 2008.   And it wasn’t until September and October of 2008 that many people I know began making the first cuts in personnel.   And then we all began to draw up new year budgets with significant cuts in overhead.

When I told my good friend and remodeling consultant, David Gerstel (author of the great book “Running a Successful Construction Company” published by Taunton Press in 2002) that I was hard at work on an A/B/C budget accounting for a 20%/30% and 40% decline in revenue, he asked if I had prepared the “H” budget – “H” for “when hell freezes over.”

I hadn’t at that time but I have now.  If my business has declined 33% already, I don’t know where it’s going for the rest of the year and I am hard at work on that “H” budget.

This is what it means for me:

  1. My already minimal overhead can be decreased a few % points;
  2. My personal spending can be decreased by 10% relatively easily and by 20% with some attention (I’m planning a ‘stay’ vacation this year exploring my own beautiful backyard of Seattle rather than traveling somewhere exotic – like Mexico).

Add this to an increase in marketing energy   I’ve written and will send 12 letters to high-end remodelers in the Seattle area who I don’t yet know but who work in my neighborhood indicating my interest and availability in helping them get through this recession.  I’m also sending out letters to CPA firms asking for full-time, part-time work in construction accounting, client work-ups and budgeting.  In short, I’m turning up the dirt in new areas of my new city looking for new introductions, new conversations and the ability to help new people.

So I’m feeling better about the next 6 months. However, I’m not/we’re not out of the woods yet – no matter what happened last week in the stock market.

So make that budget, that “H” budget, then put it in a drawer but know you’ve faced the tougest test – what will I do if the unthinkable happens — if my business drops significantly more than originally anticipated.  I haven’t yet hit that 40% drop but because 33% is not that far away from 40%, now is the time to exert extra energy, focused attention to the task.

Good luck to us all.

PS:  I’d be very interested in how your business is faring.  I’d be glad to start a chart tracking the changes in volume of anonymous remodeling companies for 2009, Quarter by Quarter.  Please send yours to jfmiller@remodelservices.com.  I promise confidentiality.  Thanks.

The Last Waltz – what do you play?

Over the weekend I watched The Last Waltz, the Martin Sorcese documentary on the last concert given by The Band, a fixture in music during the late 60s into the mid 70s.  The Band worked with Bob Dylan during a brief period in Woodstock, NY where they produced Music from Big Pink as well as The Basement Tapes – still great pieces of music

I loved the music, enjoyed watching the guest artists (Neil Young, Joni Mitchell, Dylan of course) but what struck me most about this performance was the incredible cr0ss-pollitantion of most (all but one of the 5) of the musicians:

The organ player, a difficult instrument to be sure, played the sax; one of the lead singers and guitar players also played the fiddle and the piano, the drummer played the piano, the cello and sang, the piano player worked miracles on the drums – another difficult instrument.  Each one played their secondary instruments nearly as well as they played their primary.  And 2 of the 4 sang at the same time they played.

In other words, they were each cross-trained!  They could have taken the entire show on the road (oh yes, that’s what they did for a living) and if one were sick, another would replace that instrument and even those vocals.  Perhaps the precise sound wouldn’t be the same but the outcome would be similar enough to be equally effective.

This raises the big question:  how are you doing in cross-training your people?  Even more important, how cross trained are you?  What instruments, to maintain the metaphor, can you play when things get tough?

Can you do AP, process payroll, reconcile the bank statement, calculate cost to complete, develop a good cash flow, hire and fire effectively, train the least skilled of your employees to do their job well?

How many instruments do you play?

If I were you I’d print out all the job descriptions from the primary players in the company and highlight those areas in which you’re fully capable as well as those in which your skills fall far short of ‘fully capable’.  Then you’ll know what you need to learn, they you’ll know where the company is vulnerable in terms of its skill set.

Keep practicing!

What it takes to be a successful CEO!

As I survey the landscape of clients, colleagues and friends in the remodeling industry, I look for patterns of success as well as patterns of failure.  These patterns, I’ve discovered, are not black and white, but shades of gray.  That’s one of the beauties of growing older (of which there are many to my mind) – I’m not quite so intent on placing my personal opinion, righteously defined, into the mix as the only opinion.  There are, as Rick Steves said on a travel program last week “many different truths which many different people hold as self evident.”

So it was with interest that I read in the Sunday NY Times (March 15, 2009, Business Section “Openers”, page 2) that a turn-around expert defined one of “the keys to effective leadership” as “you treat everybody incredibly well and lead with a bit of humility.”

He also said, in the same paragraph: “so I’m constantly asking the question, ‘What are the two or three levers that, if done right, if pulled correctly, will really turn this business?'”

So the obvious questions which come from the first paragraph of this short column entitled “Can you Pass a CEO Test?” are these:

  1. Are you humble?  Can you see others’ points of view easily and not just acknowledge the potential reasonableness of theirs but also change your own mind based on what you learn?
  2. What is the primary lever to pull to change your business around?  What is the secondary and then the tertiary?  For many people the primary lever is cash — banks are cutting lines of credit, clients are slower to pay and cash is the defining line between success or failure.  For others who have protected cash, and not spent it during the past year, the primary lever is sales — these are hard to come by now; competition is fierce and speed to the client is definitely not of great importance.  And finally, it might come down to morale:  yours and and that of your employees:  how do you keep those valuable people who remain upbeat enough to focus on productivity, positivism and playfulness — the 3 “Ps” in my mind which drive good morale in any company.  Oh yes, let’s add a fourth:  PROFITS!

The last paragraph says quite clearly something I’ve been asking for a long time:  “If compensation isn’t going to be the same, where do you get your fulfillment in life?”

Read the article in its entirety (it’s short):

http://www.nytimes.com/2009/03/15/business/15cornerweb.html?_r=1&scp=1&sq=GReg%20Brenneman&st=cse

Are you close to the CENTER of your company?

There’s an interesting article in the NY Times Business Section today entitled “Is it Time to Retrain Business Schools?” which says, in part:

“Some employers and recruiters also question the value of an M.B.A., and are telling young people they can get better training on the job than in business school. A growing number are setting up programs to help employees develop skills in-house.
On many campuses, changes are under way in courses and curriculums. Some schools are heightening their focus on long-term thinking or leadership, and many are adding seminars to address the economic crisis.
Jay O. Light, the dean of Harvard Business School, argues that there have been imbalances both on campuses and in the economy. “We lived through an enormous extended period of financial good times, and people became less focused on risks and risk management and more focused on making money,” he said. “We need to move that focus back toward the center.” ‘

How about it, how close to the center are you, is your organization?  By this I mean:

  • Are you, the owner, intent on personally touching your clients knowing that they are the backbone of your survival?  We’re not talking here about Citibank, we’re talking about a good remodeler desirous of maintaining a good reputation as well as a sufficient profit margin through this downturn.
  • Are you, as owner, personally responsible for a cash flow projection which protects the company during the wild swings inevitable in this economy knowing that cash is the primary key to long term success?
  • Are you working on a budget for a BAG (big, audacious goal – see CEO Tools for more on this subject) as well as a workable budget which allows the company to make money with 30 – 50% less knowing that net profit is the secondary key to success over the long term?
  • Are you focused on employee satisfaction knowing that it contributes heavily to customer satisfaction?
  • Are you, as owned, intent on maintaining the richness of your personal life knowing that it contributes substantially to your abililty to deal gracefully with changing times?
  • And finally, are you a true entrepreneur, knowing that “if first you don’t succeed, try try again”?

Rate yourself on a scale of 1 to 5 (5 being best) in each of these categories.  Then you’ll know what to work on to put you closer to the center!

I blinked!

I know I said I wasn’t going to read anymore about the economy but I couldn’t help it, really, I couldn’t.  The tag line to Friday’s The Motley Fool was “Is this the Market Bottom?”.  I couldn’t resist it … I had to read it.  You don’t need to read it, I’ve done the hard work so I’ll just cut to the chase for you … nobody knows.  And you’ll only know in hindsight.  But as I read the comments, one in particular from WatcherAl jumped out at me.  I’ve copied it below for your reading pleasure.

“Forget past history, investment theory, pontificating pundits and all wishful thinking – we have entered a new paradigm that is still emerging. When the consumer credit card crunch hits later this summer, the second great tailspin will resume. The US economic system is far more damaged than we are being told – the same accounting & legal firms that aided & abetted the likes of Enron have been fronting the whole derivatives debacle, so off the books debt is hidden all over the place, and, in the meantime, we have outsourced much of our real economy and replaced it with post-dotcom fluff. The bad news is coming out in dribs & drabs with enough time in between to manage FUD and reset the markets lower & lower without loosing utter panic. The road to recovery will be paved with experimental maneuvers: Federal stimulus spending, writing down trillions of debt, defending a wobbly US dollar currency, getting international cooperation on stricter banking rules & transparency, and moving from a debt-driven consumption propelled economy to a long-term sustainable one. Meanwhile, emerging export economies will have to learn to consume & spend, while China will have to learn to be a responsible global economic power – a tall order for a Communist controlled society that is tempted to do some power grabbing while Uncle Sam is in the ICU. So, do yourself a favor: invest in creating a more sustainable lifestyle for yourself that won’t leave you overly dependent upon a vast chain of questionable players who may decide to yank your leash from time to time just to show you who is really in control. And if you really do want a better world for your grandchildren to live in, engage with this current administration and help them to do the right thing. You have an Ivy League A student in the Oval Office now, instead of that grade C sock puppet with the Bin Laden Family & Enron buddies, so he’s probably much smarter than you are – help him to sort through all of the conflicting advice and find us a workable path out of this firestorm and onto safe ground once again. Take a few bucks down to your local soup kitchen or homeless shelter, and invest in your beleaguered fellow citizens. Greed & perpetual self-interest are what piloted us onto the rocks – so isn’t it time to try something else for a change? Get involved… care.”

What do you think?

This week, this new week, I’m going to try harder NOT to read this stuff, but today I fell off the wagon.

Hope your week is good too!

GPM variability – is this you?

Click on the link below to see a chart illustrating how gross profit margin can change even after WIP calculations.  Is this you?

monthly-gpm-variability-real-life1

Even the best remodelers can end up in a quandary about the truth of their financial statements when gross profit margin slithers all over the map.  Here’s a real life example (data changed slightly to protect the innocent) from a good remodeler who uses WIP calculations monthly to determine true earned revenue.

What does it tell us?  Nothing valid without further investigation; here are a few questions we might ask:

  • Are you doing new types of work?  This could definitely account for wild swings in gross profit margin.  It takes experience to accurately estimate different types of work as well as field experience to produce it within budget.
  • Are you doing work with new field people?  It takes 6-8 months for most field people to get broken in to new systems and routines at any company.
  • Have you hired a new bookkeeper or changed accounting systems?  Construction accounting is the most difficult (according to my brother, a CPA) because it requires great attention to small details which change rapidly over time.
  • How do you calculate cost to complete?  Without a reasonable and verified cost to complete calculation factored into your WIP adjustment, gross profit margin can swing wildly.  Field people who look at the job site and say concrete, for example, is 100% finished might not know that the accounting system has not received nor entered the concrete bill.  Cost to complete could be in error by this simple but vital failure of  communication.
  • With what documents do you proof the WIP calculation?  If there is to be any reliability on the produced gross profit margin after WIP adjustments, it sits in the ability to relate information on the WIP spreadsheet to that in the accounting system.  That means that contracts + change orders and budgets + change orders, job costs and total invoiced must all have a direct relationship between the two buckets – WIP spreadsheet and accounting system.

Visit my website at www.remodelservices.com, click on “downloadable files/Margin Variability” to build your own chart!

If you’ve got any questions about how to make your financial accounting better, please call me.  I love this work!