Warren Buffet was a businessman. He never drove a train, wrote an insurance policy, built an office tower, or miniaturized a computer. He strictly analyzed an existing business’s ability to make a profit over an extended period and invested an appropriate amount of Berkshire’s capital to ensure a reasonable return. He eventually became the most successful businessman in history, and the richest man in the world.
From Contractor to Business Manager
It has been my mission as an industry consultant and educator to guide construction professionals through the transition from putting the work in place to becoming a business manager; to analyze their company’s ability to make a profit over an extended period and to ensure the company realizes a reasonable return on its investment. That’s what business managers do, and here’s how Buffet says they should do it.
Construction Through Warren’s Lens: Warren Buffet was famous for his wisdom about business and life. The following Buffet quotes apply to construction business scenarios in unique ways. Let’s listen to him.
- Trapped in Low-bid Acquisition
Buffet: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
If you’re building a contracting firm, a solid reputation for quality and on-time performance should be your first long-term objective. Only those firms with a solid reputation can free themselves from the strangle hold of “low-bid” acquisition and price their work with reasonable profit margins when they are “invited” to bid.
- Profit is a Guess
Buffet: “Smart CEOs never want to be the smartest person in the room.”
Without a highly qualified CFO no construction firm can continuously operate at a profit. Too many contractors have been reluctant to promote financial professionals to senior management responsibility. The reason being that some construction professionals don’t truly understand the intricacies of the construction financial transaction and are loath to admit that a professional CFO most often knows more about the construction business financial transactions than contractors themselves.
- Organizational Development
Buffet: “It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours, and you’ll drift in that direction.”
Contractors tend to build their organizations by placing loyal friends or family members in positions of authority rather than experts in the various functions. The quality of management begins to decline but goes unnoticed if the founder is willing to take up the slack. By the time the founder steps down the business may be more substantial, but management skills will have dramatically declined.
- Excessive Growth Without Adequate Capital
Buffet: “Only when the tide goes out do you discover who’s been swimming naked.”
Some construction professionals believe that acquiring new business is the only way to maintain adequate cash flow. However, when business slows down even marginally, suddenly there is not enough cash to go around, and companies suddenly fail.
- Adventuring off into Unfamiliar Work
Buffet: “There seems to be some perverse human characteristic that likes to make easy things difficult.”
Warren Buffett’s laser focus on his areas of competence has been essential to his success. As he says: “I’m no genius, but I’m smart in spots, and I stay around those spots.” It’s very common, especially amongst successful contractors, to achieve a level of success then branch out into unfamiliar areas to expand their businesses.
However, as Buffet advises, the best business owners are great at determining their area of competence and focusing on how they can capitalize on that competitive advantage, rather than trying to do everything and solve unnecessarily complex problems.
- Growing Beyond Capacity
Buffet: “What’s nice about investing is you don’t have to swing at every pitch.”
If you want your business to succeed, think like Buffett. Invest in your brand, hone in on what you’d like to accomplish and stick with it. Pass on jobs that look lucrative but are beyond your familiar geography, or specialty, or your company’s financial capacity.
- Don’t Do It Because ‘That’s the Way It’s Always Been Done’
Buffet: “Be greedy when others are fearful and be fearful when others are greedy.”
Growth for the sake of growth seldom works. Innovate and solve a problem rather than following suit with the rest of the industry. Don’t do it because “that’s the way it’s done in the industry.”
Always Make a Profit–Finally, we go back to the beginning. The purpose of any business is to make a profit. For contractors, every project is like going into a new business. Don’t wait for the next job to be profitable. Be profitable on this job.
For more information on growth, read more at: GROWTH
For a broader view of profit, read more at: PROFIT
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Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.
