So Building got a panel of experts together to tell them how to make it through the recession. You might want to get yourself a drink and listen in
The small specialist: Keen Electrics
David Keen founded Keen Electrics in 1976 in Fleet, Hampshire. He says he never wanted to be a large firm and today employs only six people, including a business partner whom he hopes will run the firm after he retires. Keen Electrics does local domestic and commercial work.
Turnover 2008: £480,200, 2007: £481,000, 2006: £462,000
Profit 2008: £173,600, 2007: £166,700, 2006: £157,300
Project profit and turnover for 2009 Both likely to be down 10%
Staff Six, including one apprentice and an office manager
Ownership structure Partnership, with two partners
Dreams of …
Attracting new clients, getting customers to pay, and pay on time, and finding new belt-tightening techniques
He should gradually hand over the reins so that the partner is fully up to speed when the time comes. Depending on when David plans to retire, he and his partner need to start considering the financial arrangements arising from David’s retirement. CL
Keen says: “There’s a perception that if you get into financial difficulties the last call you make is to your bank, but that’s wrong. Two weeks ago I called mine and told them that things were getting a bit tight. I said: ‘Rather than coming to you when I’m absolutely desperate, can I add £10,000 to my overdraft now.’ The bank agreed, giving Keen the breathing space he wanted.
However, it wasn’t quite as simple as that. “I couldn’t believe the volume of paperwork. There were several forms of between four and six pages. They wanted every detail of the business – how many vans I had, the lease agreements I’d got on them – but also every single facet of my personal finances, and of my business partner’s finances. I called the bank and said, ‘This is ridiculous; I’ll send you my accounts. If that’s not enough for you we’ll muddle through without the overdraft.’”
To Keen’s surprise, the bank backed down immediately and agreed that the accounts would be sufficient information. “It shows it’s worth fighting bureaucracy,” says Keen.
Another of Keen’s recession tactics has been to get rid of one the firm’s five hire-purchase vans, which was a spare. “If you add up the HP, tax, insurance and RAC cover we’ll save about £900 a year.”
Being a partnership does expose David and his partner to direct liabilities, but given the nature of the work they do, it is unlikely that they would cripple the business. As far as bank lending is concerned, it is likely that any lender would require personal guarantees anyway, so protection using a limited entity would not be a significant way to offload risk. DR
Cash flow and finance
Keen is finding that some customers aren’t paying at all. “We expect to write off between £1,500 and £2,500 owing to customers not paying.” Late payment is also a worry. “It’s very difficult to chase people for small amounts of money. There seems to be no way of chasing, say, £40. You can’t go to the small claims court because it’ll cost you more than you’re trying to recover but you can’t knock on their door either because it could be seen as harassment.”
Keen says he learned the value of keeping careful records the hard way. He says cash flow has been suffering recently but the extra £10,000 on the overdraft, which brings it up to £50,000, is helping. He says: “Nowadays we do keep accurate ledgers, we do profit and loss forecasts each month and we are meeting our cash flow forecasts.”
But it wasn’t always that way. “In the last recession we lost buckets of money but we didn’t know how much. We filed our accounts at the end of the year and it took months before we found out how bad things were.” Keen Electrics had lost £20,000 on a turnover of £250,000.
At this stage, the bank stepped in. “They agreed to give me an overdraft but every month they wanted to see a management report showing our profit, loss, balance sheets, cash flow, overheads. We had to get a computer and start running the business in a professional way,” says Keen. “This was when I really learned about business.”
Because Keen is signed up to the electrical contractor’s Joint Industry Board Agreement, employees’ wages are determined by the agreement. This year it has meant he’s had to give staff a 4% pay rise and next year it will be at least 3%. “It’s tough because in difficult economic times I can’t really increase my prices to cover the extra costs.”
If a payment is late, particularly during a downturn, it should be chased immediately and followed up by a letter from a credit collection agency threatening further action. Keen Electrics, being a member of the Electrical Contractors Association, may use the association’s debt recovery service for this purpose. David should see if he can get domestic clients to pay in advance of the work being done. It’s common practice with certain domestic trades and would really boost cash flow. KT
David is right to address the fact that for small amounts there is no effective remedy. Having said that, for slightly larger amounts, the small claims court is an effective way of recovering debts, particularly if the contractor can do the necessary paperwork itself. However, there is always the risk that a customer will become insolvent. And that’s difficult to deal with – aside from insurance, which may not be cost-effective. DR
Wages are set to increase by 7% over two years but the economic environment means selling prices are static, so margins are likely to fall significantly. This means Keen must focus on cash flow and keep costs tightly controlled.
Keep in regular contact with the bank.
A £50,000 overdraft on a turnover of about £500,000 is likely to be near the maximum the bank will allow in the current circumstances.
Consider introducing a minimum value order limit for sales on credit. Some estimates suggest that it costs at least £20 to raise a sales invoice. So if the costs of chasing the debt, finance charges for the outstanding amount, etc are added, it is probably not profitable to sell on credit for under £100. CL
Marketing and PR
Keen wants to attract new customers but is not sure how. “Our clients tend to come to us after their next door neighbour says we did a good job. People might see your marketing but they won’t want to hire you without a personal recommendation.”
He also wants to update the website (www.keenelectrics.co.uk)
and other marketing material. The message he’d like to get across is: “We have served the local community for more than 30 years and we don’t rip people off.”
Keen’s website looks like something from the seventies so it should update it. The content is good though, and it’s friendly and easy to negotiate. It might be worth adding some examples of work it has done though to emphasise the quality. NS
“Keen obviously have a good client base but they could build on it by looking at the customers they’ve got and thinking what other services they could offer them. For instance if a local business has used them a lot in the past they could set up an arrangement to check their electrics once a year. They could also look at new business lines, like lighting consultancy for local retailers. NS
There is no cure for the small payments Keen is owed. Go for slightly larger contracts instead.
If a payment is late, address it immediately.
The start-up consultant: DSG Quantity Surveyors
DSG was started two years ago in Newbury, Berkshire, by Steven Gosling, as a one-man band. Gosling has since hired four people and wants to keep growing. DSG’s main work is QSing for the top 100 contractors.
Turnover 2008: £232,000
Pre-tax profit 2008: £101,300
Projected profit and turnover for 2009 £68,000 (16%) on £420,000
Ownership structure Limited company, one director
Dreams of …
More post-contract work, commissions from architects and winning large retail clients
“It’s been harder growing the business than I thought,” says Gosling, who hatched the plan to start a business before the credit crunch. “I used to want to grow fast but now I’m taking it slowly and carefully. I’m aiming to hit £1m turnover in the next five to seven years. February was a bad month but now the phone is starting to ring a little.” He adds that if more business comes in he will hire two more surveyors and an office manager, and would consider moving out of his serviced office and into his own premises.
Young, high-growth businesses can be vulnerable to sudden shocks, especially in a recession, so I would advise DSG to continue their cautious approach. CL
Cash flow and finance
Gosling says: “I didn’t borrow any money to start the business, I just started working from my garage. But I got bitten badly with a VAT bill early on and learned a lot from the experience. We were getting paid and not saving the VAT from each payment. Suddenly I got hit with a VAT bill for £16,000 that I had to pay immediately. Under the accounting system I was using then, if you invoice you have to pay tax on that invoice, whether you’ve been paid or not. Luckily I was able to clear the bill that time. Now my booking accountants have advised me to switch to “cash accounting” where you only pay VAT on money that has come in, which has made life much easier.
“Now we have a £15,000 overdraft facility which we tend to dip into each month but we always clear within a week or two. And I am quite strict on cash flow. Every month I fill in an Excel sheet that shows me what my outgoings are, what I’m owed and when it’s due. We tend to get paid for our work in 40 to 50 days and so far we have always been paid regularly.”
Steven should also have a quarterly meeting with his accountant. The “surprise VAT bill” and the switch to cash accounting suggests he is not using their skills to his best advantage. CL
Not convinced by the plan to target the retail sector since it’s so dead at then moment but if this a long-term plan, assuming the sector comes back in 2010, it could pay off. NS
Marketing and PR
“We spent last year targeting the big contractors and that’s gone well – we’re working for firms like Carillion and Kier. Now we want to win work from architects and the hospitals sector. In 2010 we’ll be targeting large retail clients,” says Gosling.
He is confident he can win work from local architects. It’s more difficult breaking into the hospitals market: “The problem is prequalifying – often they want to see three years of accounts or previous experience, which makes it difficult for a two-year-old company.” Gosling has been working with an organisation called Hospitals International, which advises UK Department of Health and international private healthcare providers on procurement. He has also hired a marketing company and a PR consultant. He entered Building’s QS Awards last year and was shortlisted, which he says got him some attention, and he hopes this feature will help too (that’s www.dsgquantitysurveyors.co.uk by the way).
Given that DSG works for contractors, it should get insurance to cover situations where a trading partner becomes insolvent. The credit crunch has made such insurance difficult to get, but it’s worth trying. DR
As contractors reduce staff, there may be openings for post-contract surveying services. Contractors and subcontractors could be involved in the insolvency of their clients too, so there may be opportunities for DSG to be a link between contractor and administrator when they are negotiating completion works or final accounts.
It may be worth hiring out QSs to contractors on a weekly or monthly basis. It’s not the fee-earning world that DSG might prefer but may be a stopgap when work is short. It could also build up relationships with contractors, which might lead to post-contract work. KT
Should proceed with caution, go for slow growth and get insurance. Keep in touch with the bank and with the accountant.
The medium-sized contractor: Lindum Group
Lindum Group is a traditional contractor in the Midlands. It is a 52-year-old partnership with 460 staff. Based in Lincoln, it works locally and its services range from building projects of up to £15m to housebuilding and joinery.
Turnover 2008: £87m; 2007: £87m; 2006: £80m
Pre-tax profit 2008: £2.2m; 2007: £4.4m; 2006: £5.9m
Projected turnover and profit for 2009 £1.25m on £87m
Employees 460, including 28 apprentices
Ownership structure 420 members of staff are shareholders
Dreams of …
Maintaining strong and steady growth during the recession
Should watch turnover and profit strategy. Turnover is projected to be static, but profit is in decline. It might be tempting to chase turnover in an attempt to increase profit to former levels but this must be carefully planned to avoid taking on too much work and at a low profit. Make a plan and stick to it. KT
Lindum has not cut staff or squeezed suppliers and will not, says David Chambers, its chairman. “In bad times we need to show suppliers and clients that we have some substance and we are staying in business,” he says. “We gave our staff a 2.5% salary rise in December. There may be a recession happening but we need to create a good team environment. In the past year 10 people have retired and we have not replaced them but we are not making redundancies.”
Reluctance to make redundancies is in marked contrast to much of the industry and should put it in a very strong position once a recovery starts to take place. Maintaining skills was a key issue for the construction industry during the last recession. DR
Cash flow and finance
Chambers says: “The commercial market has reduced considerably and the work we are getting in all sectors is commanding lower fees. We don’t have targets, we just aim to break even. We have budgeted to do the same turnover this year as in 2008 but if you factor in lower fees that actually means expanding. If we achieve the same turnover in this market we’ll be doing pretty well.”
Chambers says Lindum is not suffering from late payments at the moment. “We also have people in our accounts department who chase payments all the time.
“We are in credit. So although we do have a finance facility – an overdraft – we are not using it at the moment.”
Being cash positive means Lindum can seek out acquisitions or buy land. But it must avoid overstretching its resources. In the short-term Lindum might want to consider paying off some bank debt as the interest receivable/payable has swung from £166,000 positive in 2007 to £68,000 negative in 2008. CL
Be ready to lower costs if the 2009 forecast turnover begins to look unachievable. Unfortunately this may mean redundancies are necessary. Despite being reduced in 2008, administrative expenses are still high, at £11.8m. David needs to think about the fact he’s got 184 office-based employees, compared with 277 on site. CL
Save money by cutting capital spending and keeping the dividend under review. Lindum is obviously already aware of the need to conserve cash judging by the fact it sold the firm’s investment properties after the November 2008 year end (at about its book value of £4.8m). It needs to stay focusedon managing the working capital in this way. CL
Key legal challenge is avoiding doing projects that carry more risk simply to maintain turnover. The company looks to understand this position because it is targeting markets like public sector frameworks and affordable housing – both areas where work is likely to maintain or increase. DR
This is good news for Lindum but it should prepare for late and non-payment as clients come under pressure. This means doing client credit checks and carefully examining the conditions of their contracts in respect of suspension, payment terms, adjudication procedure, and so on. Also all staff should be told to report or act immediately if payment is late. KT
Marketing and PR
The firm has a website (www.lindumgroup.com) but Chambers says “it’s more important what we do on site than what we put on our website”. Still, “we should probably think about it more, especially now we’re trying to get onto national frameworks. Ideally I’d like it to say more about who we are, our approach and our mission.”
He adds that Lindum doesn’t really have a marketing budget. “Our main marketing tactic is to do the job well.” Lindum was listed fifth in the Sunday Times’ Top 100 Best Companies to Work For in 2009.
Lack of formal marketing budget suggests Lindum has got to where it is without planning it. That’s great when you’re doing well but, especially in a recession, it would benefit from a structured approach. Even if you’re successful, you need to monitor why, so that you keep doing it. Should record what it is spending entering awards, taking people to lunch and working on their website, and look at what brings in business and what doesn’t. NS
Cut costs, sort out any payment problems early; don’t chase turnover while ignoring marketing.
- We will be returning to these three companies in six months time to find out if our advice worked …
Original print headline - These three men are looking for some sound business advice
Photography: Steve Schofield