HOW TO ALWAYS MAKE A PROFIT
I Can Hear Some Groaning:
“More theory.” Many will say: “Nobody always makes a profit. Some jobs just don’t pan out. Come out here in the field and try to always make a profit. Try to make a profit in the recession we just came out of that almost cut our business in half. No one always makes a profit.”
Current Attitude Is:
“We make money in the long run, not necessarily project by project. There are ups and downs. It’s always been that way. It’s the nature of the construction business. It takes years to build an organization so you can’t just lay off people when business slows down and expect to hire them back the instant you need them again. And besides that, these people are like family to me. They need their job, and I feel responsible to go out and get work to keep them busy.”
Beware beliefs! The human mind is not the fact gathering, rational instrument that always arrives at the inevitable logical conclusion. In fact, recent studies show that much of our fact gathering faculties are biased and tend to collect information that supports the beliefs we already hold. When things change some tend to ignore “new” facts that do not support the notions they already believe. This bias can prevent us from collecting new and accurate information in reaction to changes in the business climate. This explains why we sometimes fail to make a profit on jobs we were sure were right for us and why our industry has the second highest failure rate in the country right behind restaurants.
Let’s Test Some Industry Beliefs
Let’s test some beliefs that may have been correct at some point, but need to be questioned in an evolving business climate. Ask yourself the following questions and answer in the privacy of your own mind. Simply note them and we’ll go on together.
- Revenue growth is the rocket fuel of profitability. T____ F_____
- Overhead is semi-fixed. T____ F_____
- Our company can build anything. T____ F_____
- Growth is always good. T____ F_____
- Cutting back is a sign of weakness. T____ F_____
- We can build anywhere. T____ F_____
- Some unprofitable jobs are unavoidable. T____ F_____
Consider the Results
- Most construction professionals believe that the seven statements above have been and still are true.
- Research data reveals that out business environment has evolved to the extent that all seven of the above statements are false.
We Need to Take a Closer Look
Over the next few months this blog will endeavor to inspire an in-depth discussion of how to re-examine the beliefs that are driving the construction industry into the next decade and beyond. Our research over 30 years suggests a new set of beginning assumptions are required to be successful in the current market.
New Beliefs for 2018 and Beyond
- Efficient construction enterprises will shift focus from growth to profitability.
- Project selection decisions based on the need to support existing overhead lead to inappropriate, unprofitable projects.
- Overhead managed in advance of market cycles is the foundation of long term profitability.
- In the profitable construction enterprise, 15% to 25% of overhead will be classified as “flexible”.
- Cash flow, not revenue growth, is the rocket fuel of success.
- There is no such thing as a “bad project”, just bad matches of project to contractor.
Embrace the New Reality:
Profit growth, not revenue growth, is the secret to success. Losing projects are not inevitable. They are not inevitable, unavoidable or unpreventable. Projects properly selected generate a profit. Losing project can be weeded out in advance. Overhead is a necessary evil not a symbol of success. Revenue growth is and should be cyclical. Profitability growth is essential. Overhead is a flexible expense that should be adjusted for every job, every quarter, every year. Firms that embrace these realities are prepared to always make a profit.
Read More: Financial Risk