How to Operate Lean in a Down Market
This is the first in a series created by the NAHB Women’s Council Communications Committee about doing business in a down market.
During these trying economic times, business professionals need to ask themselves: How lean are we running our businesses?
As the building industry rebounds, business owners should examine their bottom line and implement new strategies for success.
Here are some practical ideas to help you operate your business leaner and more efficiently:
Identify Key Markets
Make sure you stay informed on the latest building industry news, national and local statistics and emerging markets. Consider whether certain segments of your market are more — or less —susceptible to the economic conditions and then focus on the segment least impacted. Also, diversify your customer base to balance your portfolio.
Improve Your Value Proposition
During challenging times, companies often are more willing to change suppliers and consultants in order to attain cost savings or get comprehensive services. Use this opportunity to grow your customer base and sales by achieving a better value proposition than your competitor — and communicating it to your customers.
The following are several cost cutting techniques you can employ:
- Minimize your debt load and reduce expenses. Create a business operations report with monthly target numbers for what you need to operate efficiently and how much income you need to cover those amounts.
- Renegotiate office leases. Even under established contracts, landlords today are agreeing to reduce terms as much as 30% to 50% for valued tenants.
- Evaluate storage rental. If you pay for offsite storage, evaluate whether you need it. Consider downsizing or eliminating that space altogether. For example, if you have office equipment and supplies in storage that have been collecting dust, you are paying multiple times for items you may never need. Instead, sell or donate your items and purchase what you need at the time you need it.
- Negotiate with vendors and suppliers. You can get better pricing or terms by reaching out to the companies you do business with. Most times, they would rather modify agreements than loose business altogether.
- Evaluate company cell phones. Carefully review cell phone bills to make sure you are on the optimal plan for your particular usage. Family share and corporate account plans often have rollover minutes that will enable the entire team to share excess minutes without incurring additional fees.
- Evaluate corporate vehicles usage. If you have company vehicles that are not being used sufficiently or efficiently, sell or donate them to save on insurance and other expenses. You may be able to save money by reimbursing employees for personal use of their vehicles as needed, rather than continue giving them company vehicles.
- Look for credit deals. Some credit card companies offer small businesses cash back on purchases and other incentives. Look for the best deals that suit your business and consider switching cards.
- Take advantage of the new 50% special depreciation allowance. The Economic Stimulus Act of 2008 provides a special 50% depreciation allowance for 2008 purchases in which a taxpayer can depreciate 50% of the adjusted basis of qualified property during the year the property was placed in service.
This is similar to the special depreciation allowance previously available for property placed in service before Jan. 1, 2005 (often referred to as “bonus depreciation”).
Under the new law, to qualify for the 50% special depreciation allowance, the property must be placed in service after Dec. 31, 2007, but generally before Jan. 1, 2009. Visit www.irs.gov/businesses for details.
- Review your insurance policies. Evaluate your insurance policies and consider shared-cost medical plans. For example, health spending accounts (HSAs) can save significant cost and allow flexibility to share in the premiums and the deductible. For employees who do not use their entire deductibles, the contributions can mean extra money in their accounts, while you save on your employer contributions.
- Review service contracts. For most of us, it’s been a while since we’ve really reviewed service contracts. Now is the time to evaluate what services traditionally provided by outside providers can be done in-house at significantly reduced costs.
- Increase your cash flow. Evaluate your own company’s credit policies and ask customers for retainers as well as shorter terms. Some of your customers will understand and accept pre-payment terms, which will improve your cash flow and collection times.
- Accelerate you billing. Generate and send out invoices promptly. Getting invoices into your customers’ hands within a few days of providing service yields quicker payments.
- Stay on top of collections. Work your accounts receivables regularly. Take credit card payments for clients who have trouble paying on time and offer early payment discounts when appropriate. But be careful — some clients will take the discount but still not pay for 60 days.
Identify and understand the true costs for specific jobs.
Without accurate job cost data, you cannot choose the most profitable customers and job types. Therefore, take the time to measure, track and record direct labor and materials for each job, then allocate indirect materials and overhead proportionately.
Once you’ve built a history of different job types and the relative costs and margins, you can make more informed choices regarding the best kinds of customers and jobs for your business.
I recommended a review period of at least one year to properly compare costing.
Instead of more layoffs, you might want to consider reducing your employees’ hours in order to keep more of them employed. By rotating days off, you can cut expenses while maintaining coverage for tasks.
Most employees today would rather work fewer hours than have no job at all. This solution may also boost morale a little and ease the tension of working in an environment rife with the fear of layoffs.
Don’t Be Afraid to Ask for Help
Talk to business colleagues and find out if there are joint projects you can work on together for shared profits. Pooling financial and other resources with businesses that have complementary skills can be a smart way to keep businesses operating without incurring too many expenses.
Also, if you don’t know what to do, ask someone who may have more experience. Most business colleagues are willing to generously share experiences and suggestions.
And don’t be afraid to try new things. Newness is always a risk, but an even bigger risk is sitting in despair expecting positive changes.
Allison Tabor is CEO of TEAC Structural Engineering, a San Ramon, Calif.-based firm that provides structural engineering services for commercial, residential and industrial projects ranging from single-family and multifamily units to mixed-use, retail, office, hotels and solar. For more information, e-mail Tabor, call her at 925-275-0110 or visit the TEAC Structural Engineering Web site at www.teaceingineers.com.