Many of the custom builders in Builder 20 clubs I have visited recently are faced with a puzzling situation: They’ve grown their top lines, yet their bottom lines have stagnated and in several cases have actually shrunk. What is going on? In my opinion, these companies were not ready for growth. If you want to grow your company, it is not enough to simply grow volume. Companies that are ready to successfully take the next step up have distinct characteristics. They are:
- good profitability
- stable employee and trade contractor base
- solid management team
- systems and documentation
- leaders who can scale with the growth
If a company is not profitable today, growth in sales will not improve its situation. If you can’t be profitable building four homes a year, why take on the risk of building additional homes to get more volume? There’s a lot of truth to the adage, volume kills and profit thrills.
It is tough to grow without consistency. If you have high employee and trade contractor turnover, it will be difficult to achieve profitable growth because you won’t have people you can rely on to maintain quality standards. In order to grow you need to have the right people on your team playing the right positions so that you can focus on the overall strategy.
I have found that blind loyalty prevents many custom builders from being able to scale their company up. They have long-term employees and trade contractors who don’t have the capability to grow with the company. A commitment to growth sometimes makes it necessary to move people off the team and replace them with stronger personnel. Assembling a strong team requires strong recruiting, training, and performance monitoring systems. To keep good management talent, a company needs a strong incentive and compensation program and opportunities that continually challenge the team members.
Growth can bring chaos to an unprepared building company. The only way to ready a company for higher volume is to have systems and documentation procedures in place. Most custom builders, I’ve noticed, fall into one of three types of management styles. Many run their companies in crisis-management mode, putting out one fire after another. More organized custom builders operate in the problem-solving mode—when a problem arises, they analyze the problem and take corrective action instead of simply damping the fire. But the custom builders best situated to grow run in problem-prevention mode. Problem preventers put strong systems and documentation procedures in place.
When it comes to production, companies preparing to grow should develop and implement production management standards that include documented systems and procedures for controlling the flow of paperwork between sales, design, estimating, selections, and the field. They will also need systems to monitor quality trade contract documentation and customer communication and feedback. Reporting systems should provide timely feedback so problems are quickly identified and the management team can not merely solve the problem, but also implement new systems and procedures that prevent the problem from occurring again.
One of the biggest problems growing custom building companies face is job-cost creep. In many cases as a company grows in volume its gross margin percentage falls. In order to control cost creep, it is important to have strong purchasing and payment procedures and systems in place to monitor job costs and to raise red flags when the project is not proceeding according to plan. It is also important to have strong systems to control selections and customer changes.
The biggest obstacle to successful growth can be with the owner or leader of a custom building company who is unable to make the transition from entrepreneur to executive. In order to be successful, a company needs a leader who can scale with the growth. The scaleable executive hires people to design and implement systems and procedures, and then backs them up 100 percent. He seeks employees who can do a job better than he can and not be intimidated. The scaleable executive understands the concept of vision as well as the limitations of visionaries. The scaleable executive is disciplined and consistent.
In most custom building companies the leader usually wears many hats. In addition to being the president and chief executive officer, the leader may also be the salesperson, production manager, superintendent, financial manager, and more. In order to scale to growth a good leader needs to shed several of these responsibilities. A scaleable executive depends on capable staff to deal with the day-to-day operations, freeing him to work on the long-term prosperity of the business.
As a company grows it often has problems staying focused on organizational priorities. A business plan that emphasizes the company’s goals and mission will help management stay focused and understand the leader’s vision. The plan should lay out well-defined goals and strategies that drive the day-to-day actions and decisions of the management team. Management should train employees to respond based upon these goals.
If you want to grow your company’s profitability and stay sane at the same time, you need to first make sure your company has the characteristics for successful growth. Before you embark on the path to growth, take the time to prepare your company for the journey. In the long run, that’s the smoothest, sanest way to take your company to the next level.
Steve Maltzman, CPA, is president of SMA Consulting in Colton, Calif. Visit him at www.smaconsulting.net.
