Anticipating a loss in sales?

[plainpainter 217]

So let's say you are an optimist, but in reality you see grim times ahead and you want to be ready for let's say a 30% drop in total sales. What do you do?

How do you re-appropriate the parts of the financial 'pie' in your business? Do you take a hit in salary immediately on Jan 1? Do you ask workers to take a hit in salary? Or do you just not hire as many guys? I imagine with many folks that this is an 'organic' process. If the jobs aren't there you just don't hire. But the bigger your company is - I imagine things aren't as organic.

For a guy like me that is still an owner/operator - I just forego any salary and work to pay the bills to get my business through another year in hopes of better times - not a great financial plan, but I can't see anything better?

I guess in the end as business owners we take the salary commensurate with the market bears - and we make do in our private lives. Which is perhaps why I see so tons of builders living high on the 'cob' - yet were always living on the edge as far as their salary could afford, and then have one bad year, and they are never to be heard of again.

I guess my goal is to invest as much 'salary' as possible and take a 3% cut from my investments yearly - and use my business to drive as much salary as possible back into my investments. And just use a 3% cut each year to average out my salary from market forces.

[topcoat 14]

Dan

I dont worry too much about gross sales. I would welcome a drop in gross sales as an opportunity to tighten things and have a better net profit. It is entirely possible to end up much better off doing lower gross.

Also, I am very surprised that you would forego salary. To me, thats non negotiable. I wouldnt recommend that you do that. Unless your salary is absurd and you reduce it, which is probably not the case.

[plainpainter 217]

My gross sales are pitiful, Scott. I haven't effectively found work for 5 months of the year, this is the first winter where I am planning on making money based upon computer type work - but that's still in the planning stages. But many of my expenses continue well into the winter months. This year will be better - but I spent alot of money in advertizing last year and didn't shop my insurances as much as I should have - and my total operating overhead as a result was like 2k/month. Despite how profitable folks think house washing is - it takes like 40 house washes to gross about 15k in sales. Deck sales were way way off - although I topped last year's sales, only because I got other advertizing in place. But my deck sales from my newspaper ad alone dropped 90% from last year.

As well, since historically I haven't been able to get work from November through March - any 'extra' money is needed to invest back into my company come the spring. I just think of it this way - a company like mine that does deck restorations and house washing type services has an exponential sales curve over the years, and without a business plan and a starting budget - I am forced into the 'flat' area of the curve for a longer period of time. I have seen scenerios looking at my numbers where growth could triple or quadruple in one year alone - but I am working very hard at sowing the 'seeds' now for customer for future customer relationships. I have yet to enjoy any real 'maintenance' work, as my first wave of potential maintenance jobs came and went without any sales - due to the economy I imagine. But I am keeping my nose to the grindstone and one day that will change.

[topcoat 14]

Dan

Granted, I dont know much about your specific market, but I think you should include in your planning a proactive charge starting by about August 1 of each year to load up Nov-March with interior painting...residential repaint and any other interior niches you can think of in your market. I keep my "b team" crew going all winter on resi repaint work and toss them in with my nc guys as needed through the winter. I would never advocate relying on resi repaint work as a business model but its possible to plan ahead enough in the marketing moves to start lining them up by mid October if you are putting yourself in front of them in August. Especially if you are solo operating in the winter, it seems this would be do able. Honestly, I think the part you have to work out is the numbers analysis that you do. If you are convinced that you can't turn the key on the truck for less than $60/hr, you will have a hard time. If you find the sweet spot where you are consistently out there and netting a nifty little 10-20% in the winter, then you are on your way. I think you put yourself out of circulation. When you are out there, just by virtue of being out there (profitably) of course, you create your own little supply/demand microcosm.

[PressurePros 248]

What if I told you the solution in a downed economy is to raise prices? What?? Do I have three heads? Here is why I say raise 'em. Advertising ROI is still predictable. If your close ratio falls in a downed economy, you need to compensate by increasing leads. (yes, you do need to know all of your numbers)

Let me use some round numbers to keep things relatively simple. I'll also eliminate the other aspects factored in job acquisition cost.

Before slowdown:

Gross Sales: $100,000 (100 jobs at $1000 each)

Advertising/Job Acquistion Cost: $10,000 ($100 per job)

Job Leads: 200 of them (5% or $50 per job) Note: Job lead cost and job acquisition costs are two different numbers

Sales Closing Ratio: 50%

During Slowdown (you are down 20%)

Gross Sales: $80,000 (80 jobs at $1000 each)

Advertising/Job Acquisition Cost: $10,000

Leads: 200 (6.25% or $62.50 per job)

Sales Closing Ratio: 40% (this is where you are down 20%)

Solution

• You have to make up $20,000 in sales. (20 more jobs)

• To get 20 more jobs at your lower closing ratio, you need 50 more leads.

• Factoring an average cost per lead of $56 you need to spend an additional $2,800 in advertising. I would up that number to $4000 to compensate for the possibility of less response on your advertising than you may have been used to.

So now in 2010 you will gross $100,000 and spend 14% on advertising. That's 4% more than before the economic downturn. To keep your margins the same, you will need to raise your prices at least 4%. That $1000 job is now $1040. Someone that was going to hire you at $1000 is not going to not do so because of the extra $40.

Note:

If you are a motivated person and on your game, you would increase your low cost lead generation.. networking with business groups and orgs, call old customers, put out door hangers, etc.

Edited November 1, 2009 by PressurePros

[topcoat 14]

Ken

You know I love you, but I really think that you are the worst thing that ever happened to Daniel Tambasco. :growl:

[plainpainter 217]

LOL hee hee

[Mathew Johnson 123]

What if I told you the solution in a downed economy is to raise prices? What?? Do I have three heads? Here is why I say raise 'em. Advertising ROI is still predictable. If your close ratio falls in a downed economy, you need to compensate by increasing leads. (yes, you do need to know all of your numbers)

Let me use some round numbers to keep things relatively simple. I'll also eliminate the other aspects factored in job acquisition cost.

Before slowdown:

Gross Sales: $100,000 (100 jobs at $1000 each)

Advertising/Job Acquistion Cost: $10,000 ($100 per job)

Job Leads: 200 of them (5% or $50 per job) Note: Job lead cost and job acquisition costs are two different numbers

Sales Closing Ratio: 50%

During Slowdown (you are down 20%)

Gross Sales: $80,000 (80 jobs at $1000 each)

Advertising/Job Acquisition Cost: $10,000

Leads: 200 (6.25% or $62.50 per job)

Sales Closing Ratio: 40% (this is where you are down 20%)

Solution

• You have to make up $20,000 in sales. (20 more jobs)

• To get 20 more jobs at your lower closing ratio, you need 50 more leads.

• Factoring an average cost per lead of $56 you need to spend an additional $2,800 in advertising. I would up that number to $4000 to compensate for the possibility of less response on your advertising than you may have been used to.

So now in 2010 you will gross $100,000 and spend 14% on advertising. That's 4% more than before the economic downturn. To keep your margins the same, you will need to raise your prices at least 4%. That $1000 job is now $1040. Someone that was going to hire you at $1000 is not going to not do so because of the extra $40.

Note:

If you are a motivated person and on your game, you would increase your low cost lead generation.. networking with business groups and orgs, call old customers, put out door hangers, etc.

I think I understood that Ken... I dont/cant look at it that detailed. We use a KISS method.... We budget 10 percent for marketing..... and we seem to consistently get the return we are looking for, this year we even improved on our return, simply by increasing our efficiency.

For example:

We spend 3800.00 on Yellow pages a year (verizon and yellowbook in two different markets... we expect 38000.00 on generated sales

650.00 spent on the post it note newspaper, we looked for 6500.00 in sales.

Sometimes the percentage marketing cost for a specific campaign return is 5, 6 or 7 percent, other times is is 11,12, or 13 percent. On a few marketing blunders it has been as high as 60 or 70 percent, and I have even tried some things that generated ZERO Sales. Over all this year with Word of mouth referrals, it looks like we will have spent about 7 percent of gross sales on sales generation (AKA- Marketing). (that 3 percent saved with our budget structure, results in net profit.) If we have a great month, we look at the marketing cost for the month and year to date, comparing it to our gross sales YTD and usually invest part of the surplus and test different marketing avenues.

I guess I could break it down to cost per lead, but I am not sure what the benefit would be at this point.

[PressurePros 248]

Mathew, Dan is asking about loss in sales. The simple answer to every question is "generate more leads". I broke it down to show that what many think is the solution in a downed economy, lower prices, is not the answer. You need to know lead costs and acquisition costs to adjust your rates.

[PressurePros 248]

Ken

You know I love you, but I really think that you are the worst thing that ever happened to Daniel Tambasco. :growl:

LOL.. Dan absorbs this stuff like a sponge.

[topcoat 14]

LOL.. Dan absorbs this stuff like a sponge.

My point exactly. And then the sponge becomes paralyzed. I think its time for an intervention for Dan. He was thinking that he cannot operate for less than about $63.75/man hr. He hasnt had a banner year and we all have concerns about next year. Now, you are suggesting that if volume is down, he should raise prices. Every bbs on the internet will be thanking you for this within 6 months. I am just thanking you a little ahead of the curve.

[plainpainter 217]

One thing Ken has shown to me - as long as you can continue thinking out of the box in terms of advertizing/marketing - you become the 'going' rate and competitors don't matter. I've seen for the first time this year the stark contrast on what folks thought was the value of my service depending upon how they found me. The difference is staggering. But it's been a long and tough road to find innovative ways to market and how to sell folks.

[topcoat 14]

Dan, there is no one in the business that is rooting more than I am for you to become the going rate.

Good point about tracking the advertising and perception of value. Thats huge.

[HotShot 34]

Here is the solution:

[ame=http://www.youtube.com/watch?v=y-AXTx4PcKI]YouTube - Alec Baldwin - Best performance[/ame]

[plainpainter 217]

I bet scrappy watched that movie 20 times.

[James 624]

Dan, you make being in business so difficult. The first five years is a work in process to gain a reputation and to separate yourself from the competition. KISS ( keep it simple stupid). Quality work and high Standards!!!

I was a very savvy Marketer when I started my biz. Once I found out I was any good I went directly to the people I wanted to work for that needed my service. Country Clubs, Women groups and certain faith based groups. One of my best ads ever was directed at the Domestic Engineer's of the house hold. They control the house! When I got good at wood. I went directly to deck builders which turned out to be a great source work till today! Nothing better than starting with new wood and taking care of it for its career which also turns into other work ? I like direct marketing by going to the source.

People I know that need the service.

You have 200 to 250 day's a year to fill up. Is there 300 to 400 house holds who need your service ? Can you make 500 to 1000 dollars a day ? People and house holds become regular customers .

reducing the days that need to be filled. Then it's time to expand or add workers ? Stay within your abilities everyones different.

KISS

[plainpainter 217]

Jim - I am getting my first wave of repeats in the last week after doing this for two years. You are right, doing quality work and high standards do pay off. I was impatient as I changed gears from doing most painting to pressure washing - even though I have been in business over 5 years, I haven't been doing washing for five years. I need to work hard on my systems and keeping customer contact in place, I have to resist the temptation to grow too fast - even though I want more money. I have had 2-3 episodes in my life of running out of steam and just 'crashing'. The only way I can run my business without this happening again is slow and systematic improvements - if too much happens to quickly I could 'crash' again.