The Most Common Reason For Construction Business Failure
There are many reason construction businesses fail. A read of a 2007 report by the Joint Center for Housing Studies at Harvard University titled “The Performance of Remodeling Contractors in an Era of Industry Growth and Specialization” offers an in depth analysis of the reasons for failure across a variety of residential construction industry segments. The report is further broken down by business sizes within those segments. One glaring observation is that smaller construction businesses fail at much higher rates than larger firms. According to the report twenty-two percent of contractors that had payrolls of less than $30,000 in 2003 were no longer operating in 2004, a failure rate almost ten times higher than contractors with payrolls of $350,000 or more. I think it's safe to assume the failure right is even higher these days due to the current recession.
But why do the businesses fail?
After further analysis of the report, along with my experience and observations over many years of assessing and consulting with remodeling businesses of various sizes, one big picture fact jumps out to answer why they fail. The most common reason is that the businesses grow faster than the business systems required to support the growth. The fact that larger businesses have a better survival rate backs up this observation. Simply put, the business needed efficient systems to grow and without them they never would have achieved the growth.
So what does this mean to the smaller remodeler and his or her business?
First, if you don’t put efficient business systems in place as a small business your likelihood of failure will be very high even if your business remains small in size. Also, even with modest growth, unless you put systems in place your business is more likely to fail. Also consider, without efficient systems, it will be you the business owner who will have to work harder and longer to get things done due to the lack of those systems. If that is the case then burn out and or the typical resulting health problems might lead to failure. But remember, that burnout happened because of a lack of systems.
So here’s my advice if your business lacks adequate systems:
Start with your financial system first. Here are four reasons I suggest you do so. These suggestions assume you have and use a properly setup financial tracking software like QuickBooks or something similar.
- First, unless you can determine the cost of being in business you won’t know what to charge for your services over and above the direct job costs of labor and materials. If you don’t know what to charge you literally won’t know whether you are buying or selling jobs. Plus, every contractor I have helped do a budget goes forward with confidence and success selling at the price they now know they need to get to be profitable.
- Second, if you have predicted the costs of being in business you have established a reference (budget) against which you can measure your efforts. This budget can then be entered into your financial software. By measuring (budget to actual report) you will know if you are selling enough work and bringing in enough gross profit on all the jobs you complete to bring in enough gross profit to cover your overhead and planned net profit.
- Third, if you know whether or not your earning enough gross profit you can prioritize how and what overhead expenses you can afford. Having that budget can also help you shop around for better pricing when and where appropriate.
- Fourth, all other systems within your business might not matter if you don’t have the money you need to pay for them and know if you will have the money you need when you need it (cash flow)!
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