John Kenney, CPRC, CEO, Cotney Consulting Group
Understanding why roofing contractor businesses can lose money is the best way to prevent that situation. The decisions and events that precede the failure of a roofing business can be categorized and quantified into a group of common causes.
When it comes to understanding the causes, one of the most interesting facts is that the events and decisions that cause or contribute to a roofing contractor’s failure occur during the company’s profitable years. If you look for the causes during the problematic years when a company is losing money or breaking even, you are only examining the result, not the causes.
The events and decisions that precede a company failure occur during the one to three profitable years before the first year of breaking even or loss. Since many companies struggle through several losing years before failure, the time frame can be from one to four or more years before failure is evident.
In researching the events and decisions that cause companies’ difficulties, I found five recurring and industry-wide risk elements to potential profit or failure. These common aspects of business failure are:
1. Increase in project size
2. Unfamiliarity with new geographic locations
3. New and unfamiliar types of installations and services
4. Changes in key personnel
5. Lack of managerial maturity.
In this article series, we will focus briefly on items one through three and look deeper into reasons four and five.
I am not suggesting that you fear growth or change. Many contractors making decisions concerning growth or expansion into new markets, locations or new and unfamiliar types of installations and services do not see them as risky or dangerous. In fact, with proper planning and controls, most of them are not. But, when two or more of these changes are undertaken simultaneously, they can be lethal to the company’s bottom line.
Increase in Project Size
One of the most common elements among contractors who fail is a dramatic increase in project size. Taking on more significant projects is a normal part of growing a roofing company. The switch to larger projects usually occurs during profitable years. However, problems can develop before
the first of the larger projects are completed.
The project size relative to the size of the company and the size of its average projects has a definite relationship to profitability. When a company is operating at a healthy profit doing a specific average-sized project and a certain top-sized one, there is no reason to believe that profit will carry over performing a dramatically larger one. Read more.