Contractor’s Corner: Adapting during a business slowdown – May 2023

By Dave Stafford

Some financial gurus are now saying we are entering an economic slowdown or, worse yet, might see a recession toward the end of the year. Scary stuff abounds with bank failures and constricted, frozen or modified loan terms. Don’t believe those who say “everything is fine,” while the Fed continues to raise rates. Having been through significant downturns, my advice is to analyze your flooring segments and be prepared to make painful decisions for your business’ longevity.

ANALYZE YOUR MARKET
Market analysis of your current business segments is perhaps the best place to start. Most commercial flooring dealers will have evolved into multiple niches: general commercial, healthcare, government, corporate, property management, general contractor, retail residential. Look back over the last six months and compare sales volume, profit, number of orders and accounts receivables with the previous year, then the last five years. Numbers don’t lie and may show an accelerating trend, up or down-sometimes sharply.

Now that you’ve done a general analysis, get specific with each segment. If the pace of requested quotations and closed sales is off, is that due to slow traffic, reduced advertising or lack of demand? Get feedback from your sales team; what are they seeing? Give them a little notice and schedule a meeting for a review and suggestions. What can be done to punch up sales or promote new orders? Are you at the mercy of a segment slowdown where demand has just taken a pause or dried up completely? You might want to have a conversation with some of your key clients for insight: What do they see with their business over the next several quarters? They might say, “We are not seeing any increase in capital projects being budgeted and what’s really disturbing is the cancellation of orders we thought were bulletproof,” or “We should be good through the third and fourth quarter, but things look grim for 2024; our order backlog has dropped 20% over this time last year.”

Talk to your competitors. Perhaps now is the time for some cooperation on a regional basis, if that is possible. In times of stress, we “borrowed” some excellent installation crews to finish jobs or used expertise from friendly competitors to complete a large job on time. Expect to return the favor at some future time or pay a small spiff for the help. Broach this cooperation carefully, in advance of when you really might be in a bind. Maybe even try a team approach with someone you trust; pool some resources, whether it be a credit line (which you provide) or installation labor (which they provide).

Once you’ve identified those lagging areas, you have decisions to make. Don’t procrastinate; act decisively with a plan to compensate for shortfalls.

DETERMINE YOUR STRATEGY
Are plans going to be short-term or permanent changes in your overall scope of business? If you’ve determined that a niche is still a viable one but performing poorly now, perhaps you can shift personnel and cut your advertising promotion in that area to save money. This may also apply with seasonal business; some institutional and government business reaches an order and delivery peak in the second and third quarters of the year.

However, if you see a segment in decline or one with increasing installation complexity, perhaps it is time to cut that one loose. We found that a government niche’s significant increase in regulations doubled the time to gain building access for project surveys, installation crews and certification of installation crew members. This had been a profitable area in the past but was cut from our overall plan.

EVALUATE YOUR TEAM
Personnel evaluation should be an integral part of adapting to business slowdowns. Any time a segment is underperforming, look at your personnel. Are they up to the task? Are they the problem, rather than a change in the niche itself? Have a candid conversation with them for feedback. If appropriate, let them know you’re considering shutting down that area of business.

Listen to what they say; it might be telling. Find out if they see themselves working in another area. You might be surprised with the answers. The approaching business showdown might also be an opportunity to weed out those average players who are coasting. Make sure you’ve made up your mind, then do not waffle with the decision. “Frank, we are going to shut down this area; unfortunately, we have to terminate your position effective this week. We appreciate everything you’ve done for us, and here is your severance package.” You may want to sweeten the package and present it more smoothly, but the bottom line is that you’ve made the decision. I’ve had tears, desk-pounding, outright threats and a call from a former employee’s wife demanding an explanation. So, be prepared for fireworks.

If you have to shut down an area but want to transition a valuable employee to a different area of the company, have those details ready and, if possible, present this as an upward move. “Steve, while we have to shut this area down, I’d like you to move to our insurance group as project coordinator. You’ve shown a talent for working with clients and project detail, and I think this move would mean more money for you.”

This is also the time to consider training and recruiting. Perhaps you see a potentially lucrative area that ought to have more emphasis and can be pursued with existing clients while exiting other business. Some have launched a specialty cleaning or maintenance business or one that was formerly subcontracted, such as shot-blasting and poured concrete floor prep. Others have employed the synergism of small- to medium-scale commercial remodeling, where you have the benefit of name recognition and reputation, while the startup costs may do minimal damage to the bottom line. Unless you are fortunate, you may have to increase your training budget and do some recruiting for a boost in expertise in that area.

ASSESS YOUR BANKING
Plan for an increase in financial glitches, negotiation and collection activities. Most have already heard about or experienced firsthand the reduction or cancelation of credit lines and faced more onerous terms when applying for a new loan. Your friendly, local bank manager may now be overruled by the “home office.” Spend the time to set up a banking relationship with several banks and split up your business. Best to do this when you don’t desperately need them.

Narrow your bank selections down and call for an appointment; take along your recent financial documents or Dun and Bradstreet rating to answer specific questions. Inquire as to their current requirements and present what you’d like to see from them and gauge their reaction. Is this branch manager someone who can make a decision, or must this be done at a regional or higher office level? Over the past several years, it seems that most banks have a revolving door for managers and personnel, which makes it tough to establish that personal relationship. If you need a favor or a quick decision, who can make it?

Many glitches may be avoided through prompt follow-up, a personal visit and negotiation. Where possible, establish contacts up the line to a regional, division and corporate level: “Fred, in case you’re out on vacation, whom might I contact at the corporate office level for a decision?”

Those who insist that everything must be done at the branch level are not being truthful. I recently had a problem with a bank account. The branch manager was nice but inept and had to call the regional office. This is where a “new corporate policy” surfaced that affected payment transfer to other credit sources. Once identified, I dealt with the issue. I have found that the least little problem must be handled quickly, firmly and with a smile. Don’t put up with the extra little fees and “gotchas”; ask them to be waived, or if not, find out what they can do instead.

The same goes for your mill credit lines; they also depend on their banks for credit extensions. Talk with the credit manager and review your status. If you need an increase, better to ask for it now rather than later. If you need to repair that relationship, find out what it will take to accomplish; perhaps you need to talk with that other supplier that’s been pursuing your business. Don’t overlook the clout of your mill rep and his pipeline into the office; more than once, a call from a rep “calling in a favor” resulted in a speedy decision.

MANAGE YOUR PAYMENTS
Collections and late payments are going to be a problem in every segment. Deal with slow payment quickly by reminding the client you have to pay your suppliers. Do your own internal audit to speed up billing; develop a procedure to alert you quickly of a change or lapse in expected payments.

Coach your billing coordinator, sales team and accounting personnel on how to uncover potential problems, how to ask for a check and get it, and when to red-flag an account. Become adept at using and following through on the “mechanic’s lien” threat-the coordination with sales and service to stop work until bills are paid without losing a client.

Lots of flooring companies have become bankrupt due to slow- or no-pay clients. Use an attorney who can file liens for you and do collections that require some legal expertise. And remember that a 60-day receivable is only worth $0.70 on the dollar and $0.40 at 120 days, a fact that your banker will be happy to pounce on when you’re pursuing a credit line increase.

An integral part of boosting cash flow now is using innovative ways to generate cash. Sell that piece of equipment you’re not using at a great price, have a “friends and family” sale of remnants or leftover carpet tile, unload larger stocks of inventory to a company specializing in that area. Arm your sales team with specials to reduce inventory or promote certain mill product lines. If you are carrying inventory left over from projects, mark it way down and pay double commission. Clients in some general commercial, corporate or institutional areas will always consider special deals if the color is right, the quality is there and it fits their needs. Besides, this can help you close the deal.

Give a nice discount for large deposits on quick-turn jobs. “We have a promotion going on right now that will save you an extra 7% on this project if you pay within seven days of completion; if you can pay in advance, that increases to 14%!” Pay the salesperson a spiff to promote it. Using this approach on a large hospitality project allowed us to get a $50,000 deposit before even placing an order and $75,000 with proof of delivery. For those unwilling to provide a deposit, get an agreement to pay for all stored materials within five days upon inspection. Yes, it will require work to coordinate, but an extra $25,000 to $100,000 for cash flow is worth it.

Copyright 2023 Floor Focus

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