Preparing for Bad Times

Bad economies are inevitable. Here's how woodworking businesses can prepare. 1998.

by Anthony Noel

The second of two parts further explores ways to minimize the negative impact of bad economic times.

In the last article we discussed the inevitability of bad economic times, even though it may be difficult to even think about them in light of the rosy climate we're now enjoying. We also began to look at some tactics for dealing with bad times, starting with product and client diversity.

Another key to surviving a downturn is your workforce. I've written often and in detail in past columns about the importance of cultivating a dedicated nucleus of employees. I'm not going to pull out that soapbox again, but rest assured that a sudden (or gradual) economic trend toward the negative is when you will very quickly find out if any of what I've been preaching has pervaded your managerial approach.

As you may know, I espouse a management philosophy that essentially mirrors the golden rule, one that is firmly rooted in honesty. That may sound altruistic, but what most attracts me to this approach is its simplicity. One of my favorite truisms goes: 'If you always tell the truth, you don't have to remember anything.' Its applicability in employer-worker relationships is indisputable, and it works both ways. If you establish an atmosphere that encourages honest dealings between you and your workers (and that includes making examples of people who are less than forthright), you will have a fiercely dedicated workforce that will stick with you through thick and thin - a very important trait that can pay handsome dividends regardless of the economic weather.

One such dividend is staying power. Shops staffed with workers who are excited about their jobs and committed to doing them a little better every time are usually the ones in the best position to tough out a sour economy. That's because they tend to be doing some of the finest work in their markets and are therefore in constant demand. Even when the economic climate is deteriorating, these organizations manage to get the better jobs and hold on to their core workforce.

Don't fool yourself into believing, however, that everyone you hire will stay with you forever. The days of lifelong employee allegiance to one company are long gone. Your goal, instead, should be to give valued employees pause when they are considering a move. They must ask themselves, 'Is the change I am considering really a change for the better?'

Some will move on, either to other shops, or perhaps to start their own. However, if you have a program in place which consistently (not constantly - there is a difference!) rewards employees with advancement opportunities, greater challenges in their current jobs and incentives for excellent performance, your turnover will remain low and workforce morale will be high. These effects will also be evident in the quality of your projects - and in the smiles of your happy customers.

What about more tangible approaches to assuring your business's longevity? In other words, handling the 'cashola?' (It always comes down to money doesn't it? As a matter of fact, yes!)

One very basic element in long-term prosperity is the 'pay yourself first' approach. If you are already familiar with this tactic for personal money management, you know the premise is pretty simple: putting a given percentage of your salary aside and allocating varying amounts to short-, mid- and long-term financial goals.

The idea behind 'pay yourself first' is a forced evaluation of one's basic (food, clothing, shelter, transportation) and non-basic (entertainment, leisure travel, etc.) expenses, aimed at adjusting those expenses so enough money is left to set aside that aforementioned percentage for other things. An oft-quoted target for those employing the pay-yourself-first strategy is to set aside at least 10 percent of one's before-taxes pay. Ambitious perhaps, but that's the whole idea: to shift one's thinking from the 'make-ends-meet' mentality - which can easily bait us into spending every dime we earn - to one that encourages near-term frugality and careful consideration of buying decisions in order to achieve long-term prosperity.

Sound logical? Well, guess what. It's not a bad way to run a business either. There are some basic differences, of course, but the overall goal is to give your company the wherewithal to make it through the bad times while maximizing the profits the good times garner.

One model of 'pay your business first' depends heavily on a careful program of estimating and cost accounting. (I hope everybody is doing this by now.) Let me say that in my humble opinion, if you are not doing both of these things on a regular basis with the overall goal of making your pricing as accurate as possible, you are wasting your time - and money.

Here's the 'Reader's Digest' version of why: You 'guesstimate' a price on a job, you get the job, you finish the job, but you lose your shirt and your jeans are now cutoffs. You quote another job by the seat of (what's left of) your pants, you get the job, you finish the job and now you're buck naked. What have you learned?

If your answer was that you need to price things based on real, not 'feel,' numbers, you are right. So the next time you price a job, you figure out the cost of your labor and overhead and materials and wastage. You tack on a profit margin. This is what I mean by 'estimating.' You get the job...sometimes. But that's O.K., because a job you get that loses money is actually a job that, in the long run, gets you.

So you finish the job and figure out if you made what you thought you would, which is what I mean by 'cost accounting.' How did the reality of the completed job compare to the pricing you did before you were awarded it? How can you use what you learn by answering that question to improve things next time?

Once you have done enough of this kind of disciplined evaluation of the way you price and (hopefully) profit from various types of work, you will have the information you need to 'pay your company first.' We call that information 'your profit margin.'

See, with 'pay your company first,' the idea, not unlike 'pay yourself first,' is to dedicate a given amount of money to company coffers for short-, mid- and long-term financial planning. But you cannot do that until you are confident of how much you are going to make; in other words, confident enough to count your chickens before they hatch.

Once you get really good at applying the lessons of cost accounting to your estimating process, you can take the deposit you get on a job and put part of your planned profit aside. When you get the balance, you can put the rest away. And if certain efficiencies (i.e., getting better prices than you estimated on raw materials, finishing the job in fewer hours than you estimated) enable you to put away even more, great. It's not enough to plan for profit - you must also plan what you will do with the profit.

The answer to that question - what to do - is as individual as your business and ambitions. Do you want to pass your business on to your kids? Or do you want to make as much money as possible and retire at 45? Until you know what your long-term goals are, it is tough to plan for them. Even then, consulting with a financial planner or even another woodworker who has realized his goals might help crystallize your vision.

There is much to consider for the long-term health of your business, from risk management (in other words, insurance) to growth of financial assets (money management). Considering such things carefully, while taking your own aspirations into account, will help you build the stable foundation your company will need to thrive in the good times and survive the bad.

Anthony Noel writes, consults, and teaches woodworking and journalism, along with doing an occasional custom job in his shop in Macungie, PA.

Have a business related question? Visit WOODWEB's Business Forum. The Business Forum is co-sponsored by ISWonline and is moderated by Anthony Noel. All business topics are welcome, from sales and marketing to dealing with difficult customers.

This article is reprinted by permission of Custom Woodworking Business Magazine.