Chapter 14 – Running a Small Company and Putting It All Together

WORK * MONEY * EMPLOYEES * EXPERIENCE

There is a direct relationship among these four things. Usually, if a contractor has a lot of any one of these things, he will also have a lot of the others as well. Any really successful contracting company has a lot of all of these things. Here is why:

To have a lot of MONEY, you need to have customers who are happy with your WORK. For you to do good WORK, you need to have good EMPLOYEES. For you to have good EMPLOYEES, you need to pay them good MONEY. For you to be able to pay your employees good MONEY, you need to collect MONEY from good customers who pay you good MONEY because your good EMPLOYEES do good WORK. And because your WORK was good, customers will give you more WORK and will recommend your company to other good customers who will also give you more good WORK that will make you more MONEY.

Sounds simple, right? And it is, too, provided that you have enough EXPERIENCE as a business person to keep it all together.

If you had a certain amount of MONEY and a certain amount of good WORK which was done by a certain number of good EMPLOYEES, you would achieve a certain amount of success as a contractor, provided that you had enough EXPERIENCE as a contractor to keep your organization running smoothly.

There is a very important rule of business that is so obvious that it is often overlooked by contractors who are anxious to build up their business quickly.

THE BIGGER YOUR ORGANIZATION, THE MORE EXPERIENCE IT TAKES TO RUN IT

Simple, right? But, many new contractors make the mistake of expanding their business faster than they have expanded their ability to manage their business. As a matter of fact, this is perhaps the most common mistake that new contractors make.

Nobody becomes a successful contractor overnight. It takes TIME to build up the resources necessary to have a successful business. The four basic resources that you need are WORK, MONEY, EMPLOYEES, and EXPERIENCE. And, if you want to have a successful business, you will keep these four resources in balance with each other. The success of your company depends on it.

Also, the speed with which your company can stably expand is directly tied to these four resources. No matter how much you have of the other three resources, your company can only stably operate at the level of the lowest of these four resources.

As an example, if you had a ten person company but you only had enough work lined up for three people, you would quickly loose seven of your employees. At that point, the resources of your company would have naturally come back into balance — you would now have enough work for three employees and you would only have three employees. Your company would also be earning only the amount of money of a company with three employees, not ten.

So, you can see that it is the lowest resource that dictates what level a company can stably expand to. Other examples of this would be when you are offered a large job, but you can’t take it because you don’t have enough EMPLOYEES to do the work. Or you had to turn it down because you wouldn’t be paid for sixty days and you don’t have enough MONEY of your own to cover the job expenses.

Many contractors who try to expand their business are unaware that they are lacking the proper amount of one or more of these four resources. And when they try to expand their business without making sure that they have enough of each of these four resources to handle the new expanded size of their business, they get into trouble.

Here is what can happen to a contractor who tries to expand his company without the proper amount of WORK, MONEY, EMPLOYEES, or EXPERIENCE:

WORK

Obviously, it is unlikely that any contractor is going to hire more guys if he doesn’t have work for them. But some contractors make the mistake of hiring more employees when they only have a brief period of extra work, not extra work that is going to continue for long enough to justify hiring more employees.

Another common mistake made by contractors is to assume that all work is good work. This is not true. Some work is definitely good, and some work is definitely bad, and most work is somewhere in between these two extremes. It can prove very unwise to do a very large job for a new customer without having first worked with him on a smaller project. For a contractor to expand his company stably, it is not enough for his company to have a lot of work; it must have a lot of good work.

MONEY

The most common problems that contractors have are about MONEY. Here are the five biggest complaints about money:

1. They don’t have enough money.

2. Customers don’t pay them soon enough.

3. Customers don’t pay them at all.

4. They don’t have enough money to pay their bills.

5. They don’t have enough money to expand.

When a contractor thinks that his problem is that he doesn’t have enough money, he has made a very significant mistake. You see, in the contracting business, not having enough money is never a contractor’s main problem, it is only the symptom of a bigger problem.

If a contractor doesn’t have enough money, whatever the “reason” is, it means that he has already made some kind of error in running his business before he had the money problem. There is a rule about this:

THE FINAL PROOF THAT A CONTRACTING BUSINESS IS SUCCESSFUL, IS THAT IT IS MAKING A PROFIT

Let’s suppose that a contractor did a job for a customer and then the customer didn’t pay the contractor, and so the contractor couldn’t afford to pay employees who had worked on the job. What is the biggest problem here?

A. The customer didn’t pay the contractor.

B. The contractor picked a bad customer to do work for.

C. The contractor didn’t have enough money in reserve to pay what he now owes his employees.

D. The contractor is not experienced enough to run his contracting company at its current level of operation.

The answer is — all of them! They are all big problems that will, sooner or later, result in a contractor needing more money than he has.

Every one of these problems is taken up in greater detail in other parts of this book. The point here is that the contractor had already done lots of things wrong before he figured out that he had a “money” problem. And, unfortunately for the contractor, because he thinks that his biggest problem is that he hasn’t been paid by the customer, this contractor won’t be able to actually handle the more basic problems that he should be fixing up. And until he fixes up whatever the basic problems are, his company will never be very successful.

LACK OF MONEY IS NEVER THE REAL PROBLEM — IT IS ONLY A SYMPTOM OF A BIGGER PROBLEM.

IF YOU WANT TO REALLY FIX A MONEY PROBLEM, YOU MUST FIRST FIX THE BIGGER PROBLEM THAT CAUSED THE MONEY PROBLEM

 

EMPLOYEES

The most important thing to understand about employees is this:

THE QUALITY OF AN ORGANIZATION IS DETERMINED BY THE QUALITY OF THE PEOPLE WHO MAKE UP THAT ORGANIZATION

If you want to have a good company, you will need to have good employees. It’s as simple as that.

There are literally thousands of things that can go wrong with employees. They can steal from you or your customers. They can show up late on the job or never show up at all. They can get into auto accidents. They can get into fist fights. They can get sick. They can be hurt on the job or get hurt at home. They can hurt somebody else on the job. Their cars can get stolen. Their tools can get stolen. Their children can get sick, get lost, get arrested, or get pregnant. They can upset your customers. They can make false claims at the labor board or with your workmen’s compensation insurance. They can drink or take drugs on the job. In short, bad employees can find lots and lots of ways to do things which will harm your company. Bad employees will cause your company to loose money.

On the other hand, good employees will do many things that will help your company to succeed. They will show up on time, do good work, and keep your customers happy. Good customers will make your company money.

EXPERIENCE

Of the four main assets of a successful contracting company — WORK, MONEY, EMPLOYEES, and EXPERIENCE, perhaps the least appreciated and most important is EXPERIENCE. Without it, you will soon be out of business. With it, you can overcome almost any problem.

If you are operating your business correctly, then as your contracting company grows, you will gradually but steadily be accumulating more work, more money, more employees, and more experience.

If you are running a twenty man company, you are going to need a tremendous amount of experience. Fortunately, you do not need all that experience to run a one man company. As you gradually build up your company, you will have the opportunity to gradually build up your experience.

By reading this book, you are gaining some of the experience of a man who has learned how to successfully run a twenty man contracting company. As you work each day to make your own company a success, you will be gaining more and more experience. Each day you will know more than the day before.

If you want to gain the most useful experience in the least amount of time, it is important that you learn how to observe things correctly. This is actually a skill that you can learn. Basically, the secret of accurate observation is that you see what is really happening, and not just what you assume is happening. Think about it, and if you can figure out what that last sentence means, you will have started on the road to learning the art of accurate and correct observation.

PUTTING IT ALL TOGETHER

Once you have built your business up to the point where you are beginning to hire employees, the basic thing that you need to do from then on is to simply continue to do what you have already been doing — promote for more work, do the work, collect the money, and make a profit. Just do this day after day, week after week, always making sure that you keep the four basic resources of your company — WORK , MONEY, EMPLOYEES, and EXPERIENCE — in balance with each other.

If there is some problem with something in your company, don’t make excuses for it or justify the problem in some way. Just find out what caused the problem and fix it, so that the same problem doesn’t happen again.

When you expand the size of your company, handle all the reasons why it is not making at least a twenty percent profit before expanding again. In this way, you will always make sure that you have enough money when you do expand again — you will have made the money necessary to expand before you expand.

Promote for more work than you need, pick only the best customers to work for, make sure you service your customers well, make a good profit, invest your profit in expanding your company, carefully hire new employees, learn from your mistakes, make use of your growing experience, quickly locate any problem within your organization and fix it, and when everything is running smoothly at your new level of operation, and when you are making at least a twenty percent profit, increase your promotion again.

If you can do these basic actions well, over and over again, you will soon find yourself with a very successful business indeed.

THE STORY OF HOW ONE MAN BUILT A SUCCESSFUL CONTRACTING BUSINESS

This is the story of John, an electrical contractor. John could have been a carpenter, plumber, painter, cabinet maker, general contractor, air conditioning installer, interior designer, carpet installer, or any other kind of business person involved in the trades. John happened to be an electrician, and this is the story of how he built up his contracting business.

Although John had only recently gotten a job as an electrician’s helper, he had already decided that he wanted to become a successful electrical contractor. Fortunately for him, he found a book lying around the office which explained many things about how to become a successful contractor (can you guess which book it was?), so he was in a good position to plan out his future career without having to make a lot of mistakes along the way.

The first thing that John did was to learn a lot about the electrical trade. He went to a trade classes at night and read several books about electrical theory and also books about electrical work. John continued to work in the daytime, first as an electrician’s helper, and then, as he gained more knowledge, as a journeyman.

Eventually, as was required for becoming a contractor in the state in which John lived, John got a contractor’s license. At this point John was ready to seriously consider starting his own contracting business.

For a few years John had been collecting basic electrician’s tools. He also had wisely decided to buy a small truck instead of a car the last time that he had bought a new motor vehicle. Because of this, John had been able to do some small jobs for family, friends, and acquaintances on weekends.

John learned a lot during that time. He learned that people don’t always pay you exactly when they originally promised. He learned that he generally underestimated the time that a job would take. He learned to recognize good customers from bad customers. On many jobs, John only broke even or even lost money. But because John had a steady job working for another contractor, he never got into trouble financially. And he ALWAYS made sure that he did a good job and that each customer was happy with his work.

After a while John realized that he was making a twenty percent profit on his side jobs. Also, it seemed that more and more people were calling him and wanting him to do work for them. The people that John had already done work for were calling him for more work. Also, they were recommending him to other people.

John found himself with more work than he could do on the weekends only. He had a talk with his boss, and they worked out an agreement where John would still do some work for his employer, but he would also take more time off to do some of his own work.

Once John had worked this out with his boss, he was free to put a little ad in the paper. Sure enough, he got even more work and soon John found that he had a full week’s work without needing to do any work for his boss. John told his boss that if he continued to have as much work as he did right now, John was not going to be available much to work as an employee. John’s boss had watched John’s progress as an independent contractor and was not surprised or upset.

John left with an agreement that if he ever did need some work, he could go back to his old company for a part-time or full-time job. Because John had kept all of his agreements with his old boss, he would be welcome back at any time in the future.

Now John was on his own! Would he succeed or fail? John was determined to be a success. The first thing he did was… absolutely nothing different than he had already been doing. After all, by doing good work, and making sure that each customer was happy, and keeping a small ad in the paper, John was able to stay busy. John never forgot that the proof of his small company’s success was whether or not it made a twenty percent profit.

Once John was working a full work week, and he was making twenty percent profit, he knew that he was successfully running his small company.

John was now ready for the next step. It was time to raise his prices. John had been basing his prices on a rate of thirty dollars an hour, so he started bidding jobs and charging customers at a rate of thirty-five dollars an hour.

Some of John’s customers went away, but most of them continued to hire John to do their electrical work. For a while, John had been turning away customers because he just had too much work. But, after he raised his prices, John discovered that he now had just barely enough work to keep him busy.

Because John knew that it was a very important rule in contracting that a contractor should always have more customers wanting him to do work than he has time for, John decided to put an ad in the phone book. He had to spend some money on the advertising, artwork, and a deposit to the phone book company, but he had plenty of money by now. He had been making a twenty percent profit for months and had been able to save up thousands of dollars by this time.

Once the phone book ad came out, John really started getting busy. There was just no way that John could keep up with it all. The only way that John could even begin to do the work that these customers wanted him to do would be for John to hire some guys to help him do the work.

So, did John hire some employees? No, he did not. He raised his prices. John knew that he was not charging his customers enough yet to afford any employees. John raised his prices to the same rate his competitors were charging. Right away the demand for John’s work dropped, but John still had enough work to keep him busy.

At this point, John was making a lot of money. He was working full time and charging his customers at a rate which was much higher than his expenses.

His company was very successful — it was making more than a twenty percent profit. But, because he was a good businessman, John realized that he wasn’t so busy that he had to turn away work, so it was time to do some more promotion. John expanded his phone ad to the largest size possible and also started mailing out fliers to businesses in his area. This increased advertising brought in lots of new customers, and John was able to pick and choose from the very best of them. John was a very happy contractor.

By now John had saved up lots of money in his company. He never had to worry about money. He had more customers than he could handle. Also, John had gained a tremendous amount of experience since he had first started his company. It was time for John to hire an employee.

All the experience that John had gotten while he was learning about which kinds of people to do business with came in handy now. John interviewed fifteen applicants over the phone. After checking the references of five of these potential employees and finding that only two of the references checked out, John had these two applicants come in to his office, and he hired one of them.

Now John had to make sure that he had twice as much work as before so that he could keep both himself and his new employee busy. This was no problem as John had been turning away work for quite a while.

John kept working, making sure that all of his customers were happy with both his work and his new employee’s work.

During this time, John learned a lot about how to manage his time so that he could do an increasing amount of administrative work and still be able to put in a full day of electrical work himself. Although John was able to pay his company bills and make payroll, his company’s profit dropped to only five percent. So John didn’t expand further, but instead worked out all the bugs in his company at it’s current size.

Gradually, his profit came up to ten, fifteen, and finally, twenty percent. Once again, John had expanded his company to a new level and then taken the time to balance the four basic assets of his company — WORK, MONEY, EMPLOYEES, and EXPERIENCE. John knew he had once again brought these four assets into balance because he was once again making a twenty percent profit.

When he felt that he was ready and when his company was again making a twenty percent profit, John hired another employee, and then another, and another. And again, each time John expanded the size of his company, he took the time to keep his four basic company assets in balance. In this way, John found himself in charge of a successful company that had, including himself, five employees.

John was a busy man, indeed. At this point John was finding that he could not work in the field and also sell enough jobs to keep his other employees busy. So, John decided not to do any work in the field and to concentrate on selling. This turned out to be a successful decision for John. He was able to rely on his employees to produce enough income, and he was able to hire several more employees as a result of his increased sales.

One of the employees that he hired was a secretary. He had long ago hired a payroll company to do his company’s payroll each week, and he had an accountant to handle his taxes, but John now had a company with eight employees. Just answering the phone calls was becoming more and more time-consuming.

It was still one of John’s most important jobs to make sure that all of his customers were still satisfied with his company’s work. Fortunately, John had learned how to choose both employees and customers wisely, so that the work that his men did was of excellent quality, and he rarely had problems with upset customers. John continued to expand his company, always making sure that he worked to handle any reasons why it was making anything less than a twenty percent profit before he expanded further.

As a result, John became a very successful contractor and lived happily ever after.

Author’s Note: I wish I could say that my own contracting story was as nice as John’s. In fact, I made quite a mess of my contracting business for the first few years, which is why I’m so intimately acquainted with all the things that can go wrong with a contracting business. Even today, 30 years after I started my own company, I continue to make tons of bone-headed business decisions resulting in a lot of grief for myself and my staff. But at least I’m still learning. I’m pretty sure I’ll get my business plan set up perfectly any day now…