By: Rick Phelps, Principal, Synchronous Solutions
Growing a fabricating shop from $2M a year in revenue to $6M per year can be a treacherous journey. It has been likened to the early pioneers crossing the Badlands in their wagons – you better be prepared for the journey or you will die along the trail. In this article I will walk you through why it is so treacherous, and what you can do to navigate to the other side.
The problem with growing from $2M to $6M is the need to buy capacity before the actual need for it, and therefore before that capacity can pay for itself. The risk during the journey across the Badlands is that you destroy your profitability at the very time you need those profits to fund the growth. Stalling out in the middle of the Badlands is not a good idea!
This journey requires tripling the size of the business in as short a period of time as you can manage. It will be a period of hardship for those on the journey, so it helps if you understand and convey that message up front!
The capacity you need to add to grow is primarily through people at this point. For this reason, you will want to become familiar with the concept of Labor Productivity. I suggest you take a minute to find and read our article: ‘How Much Revenue Should the Business Bring in for Each Employee?’ That article explains how to calculate the Revenue per employee required to achieve a minimum Net Profit of 10% or more. When crossing the Badlands you do not want to drop below this 10% threshold if at all possible.
This means as you grow you need to drive the profitability well above 10% before each investment in a new team member. What does it take to drive up the profitability? It takes everyone on the team working harder, smarter, and longer, to make it happen. Again, communicating this up front can help a lot.
Let’s work the math on this problem. To keep it simple, we will take a number from the middle of the range described in ‘How Much Revenue Should the Business Bring in for Each Employee?’: $200,000 in Revenue for each employee on the team.
Before reading further, do the math for your business. If the revenue per employee is not at least close to $200,000 you are not ready to contemplate crossing the Badlands. You need to take a hard look at your team to see who are not carrying their weight and do what is necessary to get your business profitable and earning at least 10% net profit.
A fab shop doing $2M a year at $200,000 per employee will have around ten employees. Here is why this stage of business growth is the Badlands. There is a limit to how many employees one person can effectively manage, and that limit is somewhere around ten people. The $2M mark is where you as the owner start losing control of your people and processes. The success you have experienced so far is likely the result of your micromanaging to ensure what your team produced met your standards.
At the other side of the Badlands, your company at $6M per year will have around thirty employees. That translates into three managers at the other end. On this journey you are going to go from zero employees in true management roles to three, and what makes the journey so hazardous is the fact that these are your first people who will spend a significant part of their work week not adding direct value to what you produce. Their cost must be borne by those doing the direct work.
Most business owners, not aware they are entering the Badlands, plow ahead with growing their business by adding the people needed to get the direct work done, taking them well beyond the ten direct reports. As the number of direct reports grows past ten, the owner loses the ability to effectively manage all the members of the team. This results in quality and productivity issues, unhappy customers, and headaches that can spiral out of control. It’s frustrating as an owner; why don’t these people care as much as I do?
Many make it to $3M to $4M before it becomes too much. The owners are working more hours and often taking home less pay, than any of their team. At some point they have had enough, and they fire all but a core few employees and shrink back to a size that is manageable.
When you are aware that you are about to enter the Badlands, you know you need to prepare for the journey. Preparing for the journey in this case means stocking up on systems and procedures.
Accept that your team is going to grow beyond your ability to micromanage everything and everyone. There will simply be too many active jobs in the pipeline for you to know everything about every job. You are going to have to train your team to properly do the work you have to delegate, and to do that you will need to document how you expect work to be performed. No one else can do this work!
This work takes time, so start early. You want as many processes and procedures nailed down as possible BEFORE you even approach the Badlands. While you are doing this work and training your team is a great time to assess your players. Are these the people you want in your wagon train as you cross the Badlands? Are these the people you can count on when the going gets tough? If not, now is the time to assemble the right team for the journey.
When preparing companies for their journey across the Badlands, we will almost always find an additional 30% capacity or more with the team they already have. Make sure you are looking hard at what your team is doing and how they are doing it.
You have written procedures and trained your team, replacing a few team members along the way. You are getting anxious to start. Would you like a map of the journey? Of course you would!
Guess who the map maker is? That’s right! You, again!
Some smart dude once said that you should start with the end in mind when building a business. Let’s take that advice to heart.
What do you know about your $6M company? For starters, you know that if you keep the revenue per employee at $200K, then you will have a team of thirty, and at a ratio ten employees per manager, you will have three managers on the team.
At $6M you will be doing $500K in revenue per month. If your average revenue per job is $5,000, that means you will be doing 100 jobs a month, or 25 per week, thus averaging 5 jobs per day. How many measure techs, programmers, sawyers, fabricators, and installers will you need in the shop? Where on the journey will you need to add them? What roles will you cross-train to bridge the gaps when you need a half employee here and another half there?
How many leads will it take to get the number of quotes needed to land the 25 jobs a week? What staffing levels does this imply? When does your budget allow it?
Without a plan, you are going to make poor decisions in the moment, not knowing what is just around the bend. Hire the wrong person in the wrong role and your sales and profits will not grow as they will need to to pay for that person. Rations (money) becomes tighter and future decisions even more critical.
Forewarned is forearmed. Knowing what you need to do during this critical stage of your business journey gives you the insights you will need to navigate across the Badlands to that better place on the other side!
Is it worth the hard work and extra effort that it is going to take to keep your team tight and profitable the whole way? Only you can answer that question.
Understand this: sacrificing and crossing the Badlands is the only way to a profitable business that can eventually run without your everyday involvement. A business that provides for a great life rather than consuming your life.
Thinking maybe you will just stay small? Check out our article ‘How to Stay Small and Maximize Your Business Returns’.
