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Although history is not
a direct indicator of the future, we must learn its
lessons to avoid repeating the mistakes others have
made. In the construction industry — or the
construction equipment rental industry — learning from
the mistakes of others is crucial to success. So I am
going to share with you five of the top reasons that
companies fail.
Dun and Bradstreet
statistics show that about 10,000 construction companies
went out of business in 1998, leaving more than $1.5
billion in debts. Construction is a high-risk business,
but it is possible to reduce that risk by understanding
the mistakes that can lead to failure. The most
important thing to understand is that a single error or
failure usually is not the cause of disaster for a
company. Instead, it is the compounding of errors or
mistakes that causes a downward spiral.
The Surety Association
of America reviewed more than 80 of its claims arising
from contractor failure and detailed the causes leading
to the demise of the companies. The five most frequent
causes for failure are shown as a percentage of cases in
which the failure occurred:
Unrealistic expansion,
37 percent
Inexperience issues, 36
percent
Personnel matters, 29
percent
Financial systems, 29
percent
Management talent, 29
percent
You will note that these
percentages add up to more than 100 percent — that’s
because many claims were the result of multiple
problems. When the characteristics of each problem are
examined, you can see how these problems have the
potential to interlock or feed off each other.
Unrealistic expansion
Growing a business too
rapidly is like putting too much fertilizer on your lawn
— the goal is growth, but the result is burnout. In
this situation, the expansion of work outstrips the
contractor’s ability to manage it. Developing a strong
infrastructure including project management, accounting
systems and estimating is essential for the health of a
construction company, and much of the same applies to a
heavy-equipment rental company.
Unfortunately, what many
who are growing too fast first notice is a rapid
increase in their backlog prior to the development of
adequate project management resources. In a rapid-growth
scenario, managers may be taking on too much and
spreading themselves too thin to watch the basics, or
may be operating so fast that they miss details.
Inexperience issues
All contractors are
confronted at some time with the inability to perform
effectively on a project because of a lack of knowledge
or resources; this applies likewise to rental companies.
In the case of a company that is growing too rapidly,
knowledge and resources may be taxed to the breaking
point. Taking on projects that require an expansion of
the knowledge base and resources can be a positive event
for a company.
However, constantly
being challenged to acquire new skills or develop new
subcontractor relationships or upgrade financial
reporting systems deprives management of the ability to
manage — you’re always preparing to manage instead
of managing.
As a company addresses a
new market area, it must have the infrastructure,
resources and time to manage its new skills, because
learning curves can be steep and slippery, especially in
the beginning. Otherwise, the company will always be
hampered by the mistakes and losses that inexperience
creates.
Personnel matters
Non-business issues can
distract key members of management and drain their
performance. Things like substance abuse, death and
divorce can impact heavily upon individuals who need to
concentrate on managing a business. Unfortunately, a
common problem is the lack of a succession or management
continuity plan. Without a continuity plan, loss of a
key person can plunge a company into financial chaos in
short order. Issues apart from the company lead to
nearly a third of all business failures.
Financial systems
The success of most
companies can be tied to sound financial reporting
systems. Management needs accurate and timely cost data.
Tight cash flow, slow accounts receivable turnover and
diminishing profits are all key indicators of a weak
financial system. A CPA who stays close to your company
and your industry, not just at year-end or tax time, can
mitigate these problems.
Management talent
In any business, capable
top management is essential to coordinate the activities
of the enterprise. However, in the construction
industry, which depends on multiple departments and
coordination with outside contractors, suppliers and
other parties, talented management at all levels is
critical to success. Obviously, this too applies to the
rental companies that serve the construction industry;
again, these two business types are on parallel tracks.
Failure to complete jobs on time, high claims rates and
declining profitability are clear indicators that
management is insufficient or incapable.
Handling all of these
related issues requires great attention to detail and
the ability to coordinate and plan for contingencies.
The keystone to a
business structured for success is a well-developed
business plan. A business plan can help a company
address all of the issues in this article and establish
the goals and objectives of the organization. In
addition to dealing with these large issues, a business
plan provides insight and guidance for your day-to-day
operations.
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