Three stages of growth that can put a company out of business

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There are two major factors that cause landscaping companies to go out of business.

The first is improper labor pricing. Now, let’s assume you know your costs of doing business and what to do as costs change. Most landscape contractors would breathe a sigh of relief thinking, “Great, we are home free.  We know what it costs to do business and we know how to adjust our labor rates when things change.”guest-post-attribution-box

Not so fast! Proper labor pricing is critical, and you must change your labor rate as costs change, but understanding what to charge per hour is only one piece of the puzzle.

The second major killer in our industry today is cash flow. A company can be priced perfectly and still go out of business – because of cash flow problems. There are several things that affect cash flow. The seasonality of sales and changing overhead costs can affect cash flow.

However, even if sales and overhead costs remained constant during all twelve months of the year, receivables can still wreak havoc with cash flow. Yes, all of the above things significantly affect cash flow, but they are minor in comparison to the three specific stages of growth I am about to describe.

Every company’s cash flow will be dramatically affected with what I am about to describe. Each of the three stages of growth literally has the potential of putting the company out of business because of the cash flow problems they create.  If you find yourself in one of the following stages of growth, stop everything and create a month-by-month, department-by- department, cash flow budget in order to project what your cash flow needs will be as well as profitable pricing.  Projecting monthly cash flow needs, through proper planning, is the only thing that will get a company through times of tight cash flow.

The first stage of growth that affects every company is when the owner moves from the field into the office. In other words, the owner stops working in the business and starts working on the business.  It is an essential stage of growth and is absolutely necessary for a company to increase in sales.

This first stage of growth is really a “two-headed monster” since it creates both a labor pricing problem and a cash flow problem.  Let’s assume you are the owner and you have been working in the field with one other tech.  Again, assume you are paying yourself $30,000 in annual salary. One day the light bulb goes off and you realize if the company is going to get much bigger you are going to have to get out of the field and begin to run the company like a real business.

It’s a good theory and it’s the right thing to do. The problem, however, is that the $30,000 salary you were paying yourself while working in the field just changed from being productive labor to an overhead cost.  The company now has two people in the field, the current tech and the one you hired to replace yourself.

Let’s again assume both techs can bill out 75 percent of their time, which is high. That gives the company 3,120 billable hours a year (2 techs x 2,080 hours per year x 75 percent billable time = 3,120 billable hours a year).

With the owner in the office, his $30,000 salary just became overhead. If you divide the owner’s salary by the billable hours, that means the company will have to increase its hourly rate by $9.62/hour to cover this new overhead cost (i.e., owner’s $30,000 salary) while maintaining its current profitability.

Normally, the movement of the owner from the field to the office creates a need for labor pricing to increase $7 to $12 per hour. Few companies make that kind of change in their hourly rate so the end result is lower profits and significant cash flow problems.  Careful planning at this stage of growth is a must.

Now, let’s assume your company successfully made it through the above transition.  What’s next? The next critical stage of growth occurs around the $750,000 to $1,200,000 mark in gross sales. This is the point where the company must make some major investments in order to reach the next level of growth.

When the company approaches the one million in gross sales, guess what? QuickBooks is no longer sufficient. Now it’s time to at least consider purchasing that totally integrated computer system. The new system will cost the company from $5,000 to $50,000 plus training, and, normally, at least one additional person to take care of the daily data entry.

Another strange thing happens around the million-dollar level.  You, the owner, begin to realize you simply can’t “do it all.”  You can’t run the crews, do all the estimates, make the sales presentations, order the materials and give the company the overall direction it requires. Again, you simply can’t do it all yourself.

To get to the next level of growth will require hiring some middle managers for one or more departments while investing more in equipment and inventory. And that’s not all.  More marketing dollars need to be spent and more employees must be hired.

The hiring of each additional worker also increases the related overhead of gasoline, mechanical repairs, insurances and other fringe benefits plus more non-billable time and the cost of additional uniforms.

The bottom line at this stage of growth is quite simple. To reach the next level of growth, the company has to make a lot of significant investments before they have the sales to support it. The end result is severe cash flow problems!

Again, it is critical that careful planning in the form of a monthly cash flow budget with cash flow projections take place. At this point the company doesn’t need an ounce of prevention or even a pound of cure. What it needs is a ton of careful planning and adjusted hourly rates to maintain profitability!

The third life-threatening stage of growth in a company can occur the first year, second year or the fifty-fifth year. Not only can it appear at any time, but it can appear multiple times in a company’s life. What I am talking about here is rapid growth.  Rapid growth is defined as any growth in excess of about 15 percent a year.

Rapid growth requires more cash for inventory, receivables and increasing overhead costs not to mention the need for additional tools and equipment. Rapid growth also puts a real strain on cash flow. Believe it or not, most companies that go out of business do so in their highest volume and most profitable year. Cash flow kills them!

Growing much more than 15 percent a year will cause severe cash flow problems in your company. That does not mean a company can’t grow more than 15 percent a year, but if it is growing at 15 percent or more, it is time to do some serious cash flow planning in the form of a budget with monthly cash flow projections.

If you find yourself moving from the field to the office, reaching the $750,000 to a $1,200,000 in gross sales or experiencing growth in excess of 15 percent a year, it is time to stop and take a good look at what is happening.

Any, and all, of the above stages of growth will put a real strain on a company’s cash flow. If you are in one of these stages, it’s time for you to call a “time out.” Take time to create a month-by-month, department-by-department, cash flow budget for your company.

Creating a budget for the coming twelve months will help the company project profitability and cash flow needs on a monthly basis. The real value of projecting monthly cash flow needs through budgeting, however, is that it will “buy” you some time to prepare for the coming cash crunch.

The budget will not prevent the cash crunch from coming, but it will, hopefully, give you enough lead-time to plan on how you will get through it.  Projected cash flow needs can be met in a variety of ways…once you know what the cash flow needs are going to be and when they will occur.

The company may choose to hold back profits that might have otherwise been spent. It may need to set up a line of credit with the bank or perhaps increase its hourly rates to simply create more cash. The important thing is to project cash flow needs far enough in advance to allow the company time to prepare for it.

Normal cash flow problems are bad enough. If, however, you find yourself in one of the three growth positions described above, cash flow will not just be a problem, it will have the potential to put the company out of business.

EDITOR’S NOTE:  This article was written by Tom Grandy. Grandy is the founder of Grandy and Associates and has worked with contractors and green industry professionals for over 30 years.

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