January, 2008

Did You Plan to Make a Profit in 2008?

If you haven't adjusted for the market, it's not too late.

By Bill Lee

The holidays are behind us and a challenging year faces many dealers throughout North America. So if you haven’t stepped back from your business and taken time to plan how you are going to make a profit in 2008, you’re a bit late, but not too late.

Virtually all of us in the construction supply industry have been spoiled over the past 15 or so years, but just working through a couple of years like 2006/2007 can make the previous decade seem like a faint memory.

For me and my partners, our wake-up call came in 1975. That was the year when national housing starts dropped from more than 2 million to less than 1 million in one fell swoop.

Since we had been spoiled, we took insufficient steps to change our business to better accommodate the current business climate. Our biggest mistake? We were so spoiled that we left our old credit policy in place. As a result, we wrote off $2.5 million in bad debts that year. Had it not been for a well-heeled partner, we would have gone dead broke.

Suffering a $2.5 million loss will get your attention, so we got busy and took some drastic steps to cut expenses and preserve cash. Here a few that I recall:

Expense Control

• We canceled all raises, even those that had been promised.

• We called a cadre of hourly workers together and offered them the choice of reducing their hours to a 30-hour work week. The alternative was to reduce our work force.

• We announced a hiring freeze.

• We terminated several marginal management team members.

• Asset Management

• We changed our credit policy to 10th prox terms. We suspended credit privileges for contractors who had not paid by the 11th.

• We set a goal to increase inventory turns by 25%.

• We suspended all capital expenditures.

Marketing

Just as importantly, we got serious about marketing. For the life of our business, we had fielded a sales force, but that was about it for marketing. So we got serious about sales management.

Our managers met with each salesperson on a weekly basis to set specific sales goals, follow up on goals from the previous week, and try new marketing techniques we’d never dreamed of using before.

For starters, we hired a sales trainer to teach our salespeople selling principles. We assigned sales training tapes to each salesperson to listen to and gave a quiz to make sure that they were learning the new sales concepts. Each salesperson was assigned a sales book to read and would put in writing what he or she would do differently and report on the progress he or she had made.

Gross Margin Control

Each salesperson, buyer, and manager became focused on gross margin control. We knew for a fact that sales were going to be hard to come by, but we believed we could improve our gross margin and remain competitive in the marketplace. We succeeded out of pure desperation. To first of all survive, and second of all, to make a profit, we knew we had to become better business people.

You never recover a loss; that money was gone forever. But looking back at 1975, I believe that devastating year made my partners and me better managers and better sales people. I also believe that 1975 enabled us to make significantly higher profits in subsequent years than we ever would have, had we not been forced to learn how to make money in a weak housing economy.

What do you plan to do differently in 2008 to put money on your bottom line?