For many years I have been cautioning about the risk inherent in accelerated growth. Construction professionals, however, have not been listening to these cautions because, unlike all other industries, construction has no ongoing business inertia. Contractors must acquire new projects to remain in business at all. The unique nature of the business is such that contractors feel compelled to go from completed job directly to new job, thereby putting growth at the very core of their ongoing business. They see all new projects as growth and as soon as they sign a contract they begin to look around for the next project. Most believe there is no such thing as too much growth. There is only the danger of too little growth. As a result, the majority of construction professionals share the unshakeable belief that – Growth is Good – in fact – Growth is Survival.
Not so Fast
During my years in the “workout” business representing sureties, I discovered that most of the failed contractors confused “top line” growth with “bottom line” growth. As a result, they had unintentionally taken too many losing jobs. In their eagerness to grow they sought “bigger” jobs, that in their minds represented abundant “cash flow”. In many cases, however, they would take on jobs that were too big for their financial and personnel capacity. Supervision became spread too thin, resulting in work that at first seemed lucrative turning out to be anything but. The more losing projects a construction firm embarked on the more they diminished both their capital and capacity which then caused otherwise profitable work to lose money as well. The reality is that unless top-line growth produces bottom-line growth it is not growth at all.
Opportunistic Growth
Contractors bid on work that they are offered. In other words, as the marketplace offers up new work, contractors compete for the contract. Always concerned that there won’t be enough work to go around, most contractors bid on anything they think they’re qualified to handle and too often bid aggressively low. I call this kind of growth opportunistic growth. It is an attempt to ensure that there is always money coming in but does not carefully consider how much is going out. In the “failure” business, I would ask contractors why they took the jobs that put them under. They would invariably answer that they needed the cash flow and figured that as long as they were still in business, profitability would work itself out over time like it always did.
Planned Growth
With Planned growth a contractor only bids on projects that the CFO, operations, estimating, and marketing all agree will be profitable. A bigger job with an abundant cash flow may be passed over for a smaller job that the firm has already proven it can execute for a well-earned profit. Company overhead is always kept flexible to fit planned growth rather than taking opportunistic jobs to pay for bloated fixed overhead. According to planned growth principles, that would be the tail wagging the dog. Flexible overhead can be easily adjusted to fit the contribution from the jobs underway and under consideration.
Three Bad Beliefs
- Top line growth is always good.
- Cash flow trumps project profitability.
- CFOs are not top management because they don’t know anything about construction.
- The first belief has gotten contractors in trouble for many years. Only profitable cash flow supports overhead and keeps the company viable.
- Ongoing job profitability is almost impossible to discern in advance accurately. Contractors accept that occasionally jobs won’t make money. It’s just part of doing business. Profitable jobs are expected to make up for the unprofitable ones. If, however, contractors engage in opportunistic growth, more unprofitable jobs can sneak up on them and put them out of business. Many of the projects I completed for sureties had simply run out of cash and couldn’t keep going. The contractors were surprised. They never imagined it could happen to them.
- When I asked failed contractors’ CFOs how they allowed the CEOs to be surprised that they had simply run out of cash to conduct business, they told me that they had warned the CEOs but were either ignored or threatened with being fired for even suggesting such an outcome.
Two Kinds of Growth
Opportunistic growth relies on two bad beliefs:
1. Cash is king
2. Profit takes care of itself in the long run.
Planned Growth relies on two true beliefs:
- Profit is king
- Bottom line growth is the only real growth.
Next week we’ll discuss in detail the role of the CFO in managing growth. See you then.
For more information on business growth, read more here: GROWTH
For a broader view on profit, read more here: PROFIT
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