Over the last few months, the main topic of conversation at most businesses has been the economy and the impact that recent events have had, both on individuals and businesses. While the media focuses on the large, iconic companies such as banks and automakers, to most of us in the kitchen and bath industry, these challenging conditions hit much closer to home. By now, remodelers in virtually every major market in the country have felt the impact of the recession and the reduced consumer spending that has accompanied it.

This month we will take a look at some tools and techniques that can be used to deal with such times. We will look first at analyzing what the real status of your business is and what some possible options are, steps you can take to improve those circumstances and the impact that you, as the leader of your business, can have on your customers, employees and other stake holders in your business.

WHERE DO YOU STAND?

Hopefully, over the past few years when the market was strong, your firm invested in the business, so you have entered this portion of the cycle with your displays up to date, your tools and equipment in good shape and that “rainy day” fund with a substantial balance. Now it’s time to sit down and figure out where you stand.

To get a handle on what’s in store for your business, you need to be able to project what revenues are expected and the expenditures that go along with them. If you’ve been monitoring your floor and phone traffic, you should have an early indication of where revenue is headed three to six months ahead. A review of what the sales staff has in the works will give you an idea of what the more immediate future holds. Both you and your staff need to realistically evaluate each lead and retainer to make sure that each is still viable.

Computer spreadsheets allow you to perform some “what if” exercises based on your financial statements. Starting with your most recent annual income statement, create a “pro-forma” monthly income statement that will allow you to manipulate revenue assumptions and various expense options. Once you have created your pro-forma income statement on a spreadsheet, link the cells representing the variable expenses to either another spreadsheet containing, for instance, a list of employees and their salaries and wages, or develop a formula for that cell based on revenue, i.e. gross profit, commissions, etc. Once you have put this tool together, you can see what the effect of various revenue assumptions will yield.

Assume that near-term revenues are expected to fall 25% from recent levels. Inputting this level of revenue into your spreadsheet will give an indication of the profit situation if you do nothing. If you find this yields a loss position, you can try different strategies to bring it back to at least break even. Are there expenses that can be reduced or eliminated? Will it be necessary to reduce staff and, if so, will that be sufficient to break even? Is it possible to increase the gross profit percentage, or are you facing a challenge to even maintain the current margin?

NEW REALITIES

Now that you have determined what it would take to break even at the predicted revenue level, it’s time for some hard decisions. Assuming that your pro-forma analysis predicts a loss even after you have reduced or eliminated those expenses not involving payroll, the question then is how to deal with payroll costs.

At this point it will be necessary to make some judgments: How long do you think this downturn will last? Is it possible to increase revenues in the face of economic conditions? And how long can you sustain the losses you are projecting?

If you determine that you can bring your revenues into balance within a few months, either from an economic recovery, more aggressive marketing or cutting non-payroll expenses, then you should consider solutions that will keep your team intact. Trimming payroll expenses through reduced work weeks or shortened hours, rotating one week leaves, bringing sub-contracted work in-house or some other method of reducing payroll without terminating employees are a few options. Again, you can test these potential steps by employing your pro-forma spreadsheet.

On the other hand, if it seems likely that recovery to a revenue level that will allow you to break even is a long way off, it may be necessary to face up to permanent reductions to your staff. If you do come to this conclusion, try to make all of the of the staff reductions at the same time, so that you can assure those that remain that their positions are secure.