In my long career as a contractor to a consultant, I have had the good fortune to work with young people who had recently inherited a construction business. Most of these young men and women were already working in the family firm in a middle management or executive position, being trained to eventually take over the company. When the founder passed away, they were suddenly thrust into the top management job. Many were not ready, and most of them knew it. I was often hired to guide them through their first several years as the CEO of sometimes very substantial businesses. As I look back, these assignments were remarkably similar.
Taking the Vitals
I began by taking their focus off building and putting it on business. Not unlike their fathers, these young execs believed that building the projects was running the business. Of course, they knew that somebody had to keep the books, put the money in the bank and send out the bills, but beyond those chores they didn’t give ‘business’ very much thought. I started their training by having them take a scientific look at the business they had inherited and, like doctors, understand the business’s vital signs.
Blood Pressure
Regardless of their educational background or experience, I often had to assist with executive decisions at least until this initial review and analysis was complete and understood by the new CEO. This initial review process would:
- Start by reviewing 5 years of the company’s financial statements looking for trends in profitability, job size, type, duration, and location.
- Then, identifying the firm’s capital capacity for financing future work.
- Reviewing the company’s history of banking relations and bonding capacity.
- Evaluating current financial status and potential profitability of ongoing projects.
- And finally, auditing the existing balance sheet to be sure accurate financial data was being used to make future decisions.
Pulse Rate
Next, I would have them study an organization chart of the existing management structure and analyze the chart for the following elements:
- Identify key personnel, their scope of responsibility, and who they report to.
- Then, submit the chart to a functional analysis with each position identified as performing a specific function such as accounting, marketing, project selection, production, safety, banking, bonding, and financial reporting. They would be asked to identify any redundancy or conflict in functions.
- Next, I would have them evaluate the longevity and potential of key people.
Diagnosis
After they took the company’s blood pressure and measured its pulse rate, I would have the young executive delve into a deep diagnosis of the company’s financial statements.
- How are they prepared and how accurate are they?
- How are they used to manage the business?
- Why is the balance sheet so important for managing the future?
- What does the statement of changes tell us?
- Why do we use percentage of completion accounting?
Only after the new CEOs understood how to use financial statements to manage the business could they begin to see the difference between supervising the construction process and managing the entire business.
Prognosis
Only after a thorough understanding of the usefulness of financial statements and insight into the organization of personnel, could the new CEO even begin to manage the business going forward. Then I would ask: Where do you want to take this business in five years? What will be your strategy for the future?
Strategic Plan
A strategic plan is a map to a future goal. These young CEOs often have goals and see the future differently than the founder. Now that you’re in charge what are your plans?
- Some want to sell the business.
- Some want to hand it on to their offspring.
- Some want to cash it out as they go along. (Remove as much capital as possible.)
- Some want to run it themselves for another 25 years.
- Some want to merge it with a bigger competitor.
I caution against sudden change and suggest these young leaders create a plan by which they can eventually guide the company toward their personal goals.
In The Beginning
Teaching young contractors to recognize the essence of the business was so effective that I recommend all contractors do this mental business inventory exercise every few years.
Next week we’ll discuss how to conduct an annual strategic planning session.
For more information on succession planning, read more at: SUCCCESSION
For a broader view of strategic planning, read more at: STRATEGIC
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