With the failure rate of new contracting businesses approaching 90%, looking into some of the reasons for that high attrition rate seems to be in order. On several occasions, this column has made reference to subcontractors that are new to the business while not new to the trade. We've also speculated on how the transition from workman to businessman sometimes occurs and what happens after that first job. Whether you are new in business or have been in subcontracting for awhile, there are certain things that you must do to be successful.
Learn the business end
Being a good journeyman or foreman does not necessarily equate to being a good businessman. More often than not, the transition from employee to employer is accompanied by a steep learning curve that can run the gamut from mildly stressful to absolutely terrifying, depending on the individual and how much or how little business acumen or raw ability he possesses. Contracts, billing, bonding, insurance and taxes are a few of the items that the new contractor must take into consideration and master in order to stay in business.
What seems like common sense to those who have been in business for a few years can be “terra incognita” to the new subcontractor.
With all there is to know to keep the doors open these days, it isn't too hard to understand why the failure rate of new contracting businesses is so high in the first three years. Lack of proper education or understanding of the business environment is, in my opinion, the prime reason for such a failure rate.
Cash flow is king
Understanding and managing cash flow should be one of the first things a new contractor masters. In most cases it is not. There are as many reasons for this as there are new contractors. It's my observation that it all boils down to foresight and discipline. A new guy in business who is used to getting a paycheck at the end of each week is suddenly faced with having to wait 30, 45 or even 60 days for that paycheck. It can get a little scary. When the check arrives, it is usually for an amount substantially greater than the paycheck he used to collect. This is at once exhilarating and dangerous.
Exhilarating because suddenly you've got this big wad of money in your hands, and dangerous because without an understanding of cash flow, you can get yourself in a bind relatively quickly. Paying bills and setting aside taxes and other obligations is what the conscientious businessman must do. There are any number of other expenses and outlays that must be taken care of before the subcontractor takes his hard earned share of that check. That's where the discipline comes in. Not all contractors are conscientious, and many spend quite freely. The cautionary fable of the ant and the grasshopper brings into sharp focus the pitfalls of thinking only of today while letting tomorrow take care of itself.
In fact, there is a school of thought that suggests “front-loading” billing (billing for a greater percentage complete than actually is) is in order to get more cash earlier in the project. This practice holds that the money is better off in the hands of you, the subcontractor, than residing with the owner or general contractor. That may, or may not, be true. If the new subcontractor cannot control his cash flow by keeping current with his business obligations, then front-loading billing merely speeds up the death spiral of that contractor's business. Not allowing for a fall off in work will produce the same fatal result. Believing that the work will always be there and spending accordingly is the single greatest threat to the novice contractor. If anyone had been able to accurately predict the ebb and flow of workload in the construction business, his name would be on all of our lips today. Managing cash flow early on in a business will give that business much greater flexibility.
Self evaluation
The first step a new businessman should take is self evaluation. It sounds trite, but taking stock of what you know and don't know can really pay off if you intend to stay in business for awhile. Surprises of the nasty variety await the new subcontractor who merely does the work and pays little or no attention to all of the peripheral requirements of good business management. Waiting until something happens to deal with it is not a good plan. Being proactive and getting educated about the business side of your business takes time and effort, but knowledge is power.
There are business classes offered at almost every community college. Some states even support extension services to help new businesses with information ranging from regulatory to banking.
These days, too, there is the Internet. With its vast reservoir of free data from every conceivable source, there can be no excuse for not having critical information about your business right at your fingertips. Going into business is a great adventure, but staying in business is an even greater and more rewarding one.
The Brooklyn, N.Y.-born author is a retired third generation master plumber. He founded Sunflower P&H in Shirley, N.Y., in 1975 and A Professional Plumbing in Phoenix in 1980. He holds residential, commercial, industrial and solar plumbing licenses and is certified in welding, clean rooms, polypropylene gas fusion and medical gas piping. He can be reached at [email protected].