I recently conducted conversations with scores of kitchen/bath dealers about their companies' financial performances in 2014 and their forecasts for this year. A few were flat last year. Many enjoyed revenue growth in the 8-12% range. But there was also a fair-sized contingent that reported historic years with growth reaching the 35%+ level.
While I congratulated the historic performers on their outstanding results, I was also concerned for their welfare going forward. Why? Because they were not in control of their operations but simply riding the wave of a positive economic sea. They were feverishly manning the oars of boat, not positioned at the helm, watching the direction of the wind, then smoothly and confidently guiding the vessel toward its pre-determined destination.
I heard reports of staying at the office late night after night to get all the orders in, trying to find and hire quality help, training newbies on the fly, and getting so exhausted that they would take spur-of-the-moment quickie vacations. Moreover, they readily acknowledged being "too busy" to capitalize on intriguing educational events or new technology introductions.
Perhaps your 2014 in business resembled a bit of this frenetic pace.
The 20-Mile March
These narratives of incredible annual revenue growth provoked two immediate thoughts: (1) the U.S. financial system's meltdown was only seven years ago and (2) the financial system is still vulnerable according to multiple experts. A meltdown could happen again! So how can a kitchen/bath design firm owner best steer his or her business during an historic rise in revenue?
In my judgment, the answer is injecting a strong dose of discipline throughout your operation. It's something that has always been lacking in this industry, and has held back not only durable dealer growth but also institutional growth. Indeed, in his book Great By Choice, professor and celebrated author Jim Collins makes a strong case for managing a business with "fanatical discipline."
Having researched companies that out-performed their competition over long periods of tumultuous, uncertain times, Collins advocates a principle common to these overachievers: the "20-Mile March." This principle requires hitting specified performance markers with great consistency for many years. It also demands two kinds of discomfort. The first is delivering high performance in difficult times. And the second is holding back your business, using self-imposed restraints, in good times like 2014.
The Rear View Mirror
When a business owner experiences incredible growth, it's critically important to reflect upon that performance and consider what major factors propelled the growth. Not one of the overachievers interviewed could really point to any one button they pushed. Each was graced with a strong local market in an improving national economy.
Yet Collins writes about the most successfully durable companies not allowing external factors or pressures, like a positive business climate or an economic slowdown, to define them or their annual performances. The only way to get to where a company wants to be in, say, five years, is to make steady incremental progress year by year: achieve 20% – and no more – of the way there every single year.
In attaining 35%+ growth levels in 2014, what could these kitchen/bath dealers lose in the process? According to Collins' extensive research, absent the application of the "20-Mile March" principle, key competitor companies lost a culture of superior service, a modicum of paranoia, spending restraints which undermine the preservation of profitability, and a resilience to calamity in an unexpected downturn. Indeed, many went out of business not too long after one or two incredibly good years.
Lest we forget, after several blockbuster years of revenue growth, legions of our fellow kitchen/bath dealers became immediately vulnerable with the unexpected 2007 housing industry downturn when their builder customers couldn't pay their bills. For cabinet manufacturers, these coveted dealer accounts seemed to evaporate into thin air leaving behind many millions of dollars to be written off.
I suspect that clients of these 2014 kitchen/bath industry overachievers experienced some hiccups in the product ordering, servicing, workmanship quality and timely completion of their projects. No doubt these dealers may have lost some shine on their reputations, which could hurt growth results over the next couple of years. Unless, of course, quick steps are undertaken to adopt a different management mindset, shore up the infrastructure and sustain a culture of continuously improving client service.
Getting Started
A kitchen/bath company can always adopt the 20-Mile March discipline even if it hasn't had such discipline before in its history. It starts with owners carving out time to get out of working in their businesses and spending regimented time each week working on them.
Of the seven characteristics of a good 20-Mile March, in my view, the two most important for kitchen/bath dealers are (1) clear performance markers and (2) a proper timeframe, say 3-5 years, so it's long enough to manage but short enough to have teeth.
A SEN/KBDN post-recession survey revealed that 83% of the 200+ dealer respondents never prepared an annual budget. Yet the single, most significant performance marker that a small businessperson should have at his disposal is a thorough budget to run his operation. Developed with sufficient detail, and over a 3-year period, it empowers owners to properly plan for controlled growth, think strategically what additional support staff or capital equipment expenditures will be needed and when, know precisely what their company's gross profit margin must be when pricing jobs, and how much net profit will be made each year to be parked in a liquid Emergency Investment Portfolio.
That emergency fund needs to accumulate 12 months of fixed expenses to insulate the company from recessionary shocks as well as provide capital for potential growth opportunities.
With a properly conceived annual budget, at the end of each month, owners can monitor the company's actual performance in revenue, gross profit percentage, expenses and net profit compared to budget. It puts the owner solidly in control of his business, steering it towards the predetermined financial goals.
Whether you experienced 35% growth or not in 2014, now is the time to adopt a mindset of fanatical discipline and gain full control of your business before the next downturn. The 20-Mile March builds confidence. By adhering to the 20-Mile March management principle, no matter what challenges or unexpected external shocks, you prove to yourself – and your team – that performance is not determined by your conditions. It's largely determined by your own actions.
Ken Peterson, CKD, LPBC, is president of the Chapel Hill, NC-based SEN Design Group. For more info about this topic, please contact Peterson at 1-800-991-1711 or [email protected] Peterson also welcomes comments, questions or concerns.