Archives for September 2010

 

The phrase “new normal” has been circulating for a while now to describe the current state of affairs featuring a tougher banking environment and retrenchment of debt laden businesses and households.  The new normal envisages a future where the economy is powered by exports and business investment rather than by consumption, easy credit and rising asset prices.

Consumers are adapting to the new normal en masse by delaying gratification and repaying debt.  We are collectively holding off on buying big ticket items – and we are adopting the collective attitude that if something isn’t on sale and seriously discounted, then we won’t buy it until the vendor is willing to just about give it away.  We want to see some blood on the floor before we commit.

Tough for business owners who are hanging on in anticipation of a return to the “old normal”!

So how does your business thrive in the new normal environment?   Here are our top seven tips:

 

Continue to be lean.  Assume that boom times are not around the corner, so lock in those bootstrapping attitudes that have served you well through the past couple of years. Don’t relax vigilance with keeping overheads under strict control. 

Monitor your margins closely – for the full range of your goods and services.  There is still potential for costs to increase – and your ability to pass these on may be limited.  The new normal is not an environment where you can thrive on the average of profitable and unprofitable activities.

Use cash surpluses to pay down debts.  The new normal is no time for excessive leverage.

Take good care of your customers – and focus on adding value for them.  Those businesses that are able to provide significant value with superior service will be the ones that gain market share and thrive in the new normal.

Look for growth opportunity – and if you do expand, continue to bootstrap and try to keep your use of debt to a minimum.

More than ever – remember, cash is king. Focus on your debtors and cash management every day – and try to keep enough cash on hand – or enough headroom on your banking facility – to cover at least 30 days of expenses.  Preferably more.  

Deal with employee issues with an approach that is seen to make sense.  Despite relatively high unemployment, there is still a skills shortage – and you’re probably operating with a pared down team.  Make sure your crew appreciates and buys into the direction your business must take to thrive in the new normal – and make sure that in return you are adding value for your team on the way through.

 

The old normal is unlikely to return any time soon – if at all.  Those businesses that have survived the ressession in reasonable shape – and who focus on the seven points above will likely stay ahead of their industry averages, gain market share and thrive in the new normal environment.

 

 

 

A big thank you to the 40 or so business owners and managers in the construction trades who attended the “Building a Better Business in the Construction Trades” conference hosted by Webb Ross >>> on the past two Thursdays.  David Grindle – partner at Webb Ross – put this conference together, and his plan is to make this an annual event.  Great effort, David.

My contribution to the event was to discuss the behavious and habits that separate the excellent operators in the construction trades from the average operators.  We work closely with quite a number of clients in the construction trades, so we’re well placed to comment on this.

Here are our top seven behaviours and habits (in no particular order) that separate the excellent from the ordinary in the construction trades:

 

1.  Excellent operators manage cash closely

Resolve disputes quickly – especially those that are holding up payment.

Get paid retentions – don’t let those few minor tasks like painting manholes etc drag on and slow up receipt of retentions.

Make sure you issue valid payment claims under the Construction Contracts Act.

Don’t use IRD as a bank. Its easy to ease cashflow by paying GST and provisional tax late, but it’s expensive money.

Keep your bank in the loop. If you have banking covenants, honour them.

Get a variation agreed if the scope of a job creeps outside what has been contracted for.

Keep a cash reserve.  Preferably enough to cover 30 days of overheads.

 

2.  Excellent operators monitor profits closely

Back Cost most if not all jobs on completion.  Did they go as planned.  If not, why not?

Set KPIs – and monitor them monthly.

Set and monitor budgets.

Prepare monthly financial statements promptly, compare them with budget and understand variances.

 

3.  Excellent operators always use contracts

Although the Construction Contracts Act only requires written contracts for jobs over $20,000, we recommend written contracts for all jobs.

Know your payment milestones and manage the job around them.

Manage variations – and communicate these immediately.

Get the best from the claims process – follow the process laid out in the Construction Contracts Act to the letter.

Get paid retentions in a timely manner.

 

4.  Excellent operators are compliant

Comply with the legislation that applies specifically to your industry such as the Construction Contracts Act.

Keep proper accounting records.

Always use employment agreements for employees.

Pay people through the system – not in folding.

Deduct withholding tax from subcontractors where required.

File GST, PAYE and tax returns on time.

Comply with health and safety best practice.

 

5.  Excellent operators manage risk

Don’t rob the next job to pay for the last job as this creates huge financial risk if work slows down or stops.

Have proper insurance.

Get basic structuring right.  Operate through a limited liability company, always sign contracts as director rather than as an individual – and don’t accumulate valuable assets in your trading company.

 

6.  Excellent operators are organised

The construction trades require careful organisation – and the lack of it is a big predictor of failure!

 

7.  Excellent operators manage their brand

Appearance, apparel, vehicles, stationery and telephone manner are all important.  Be seen to be professional.

Know where your referrals come from and nurture referrers.

Network and get involved in the industry. 

 

It is my belief that the more ticks you can put beside the items listed above, the better your chances of excelling in the construction industry.  As you will know if you are interested enough to have read this far, the bar is much higher in this industry than it was a few years ago – and the ways of operating that were once acceptable just don’t cut it any more.