January 3, 2011

The seven biggest mistakes I have made in business

Lessons learned the hard way


A frank and generous gift toward next season’s prosperity,
from a pro who has been there ...

Starting business without enough investment capital
With a pickup, a wheel barrow and absolutely NO MONEY, my wife and I started our business from our 600-sq. ft. apartment in downtown Toronto. I will never forget our first winter in business, when she took a six-week horticulture course at Landscape Ontario. We had to roll our pennies just to fuel her car to get there — luckily it paid off! However, starting the company on a shoestring budget was a mistake. We actually came close to losing our newly-purchased home that winter, too. We were not prepared for how hard the first five years of business would be. We had huge obstacles to overcome, namely purchasing equipment and maintaining adequate cash flow to support our projects without enough working capital. Had we spent more time on business planning before starting, we would have understood the actual capital needed in advance. I believe that a landscape company needs 15-20 per cent of annual revenues in liquid cash, made up of its own cash and/or a line of credit. We found that the bank was not helpful until we were in business for five years, and showed three consecutive years of positive financial statements. It’s no accident that “technicians” start landscape companies — anybody with a business background would run for the hills if faced with the variables in this business! Lesson learned: Start with a budget, and stick to it!

Growing the company before the systems were in place
We started without the education or experience we needed to operate an efficient business. We simply wanted to be great landscapers. The problem is, you cannot become a great landscape contractor without great systems to follow. With great systems, your company has the means to add additional full-time crews, grow, and still produce optimum results. The transition from being hands-on owners to becoming business owners that hire people to design and create projects at the same quality (while still allowing us to earn the same profit margin that we had made as owners) proved to be more stressful than it needed to be. Creating systems by trial and error, while still managing day-to-day operations and problems, was almost impossible. We should have built the systems first, then grown into them. We found out the hard way that the secret to success in business is being prepared to do the work before you get the work! Lesson learned: Become a planning organization.

Growing too fast
We started in a neighbourhood where the real estate values were skyrocketing. We simply didn’t have the working capital to expand at 30-50 per cent each year. Our growth curve continued at such a high pace for the first nine years in business, that we continually struggled with cash flow, despite earning double-digit net profit margins every year. We could have gone out of business many times, had our suppliers not been so supportive during times of cash flow shortage. Unfortunately, most startup small businesses do not fit the lending requirements of the bank, unless the company has a great track record and the owner has a really high personal net worth. The banks are simply not helpful. Being forthright, and explaining our financial situation to suppliers, made a difference. If you find yourself in a bind with vendor accounts, communicate the situation clearly, and never break a promise once you have made arrangements to pay your debt. The best solution to this problem is to ensure you don’t outgrow your working capital — you need at least 10 to 15 per cent of annual sales in cash to manage your day-to-day operating requirements, or you will struggle and make bad decisions as a result of cash flow shortage. Lesson learned: Never outgrow your working capital.

Not identifying superstars soon enough
We have had a few outstanding people leave our company over the years, simply because they couldn’t see how this industry or my company would be able to support their future financially. We could have kept these people, and capitalized together on their capabilities, if we had the right system in place. I have developed a way of keeping these superstars, again unfortunately, by trial and error. By leveraging these people and providing a more entrepreneurial environment and pay structure, we have expanded the company beyond my expectations, while reducing my personal workload. Lesson learned: Create an entrepreneurial environment, or forever be surrounded by employees who work for a paycheque.

Trying to operate without the right equipment
In the first few years of business, I was deathly afraid of monthly payments. When we really started to watch our spending on labour and equipment as a ratio to gross sales, it was a scary state. We were spending 36 per cent on labour and six per cent on equipment. Most of our equipment was old, we didn’t have a mechanic on staff to maintain it, so we had a lot of downtime, and often we were working harder, longer hours than we should have been, with more people than we needed. I started turning out the older gear and leasing newer versions of the right equipment to ensure labour savings. We found we could do more work in less time with fewer people. We were on to the next project sooner, our sales revenue increased, labour spending dropped to 22 per cent of gross sales within 18 months, and equipment increased to 10 per cent of gross sales. The result was an increase of 10 per cent in net profits, and better yet, our revenue had increased by 82 per cent with the same number of people. That meant we could pay better wages to staff, pay ourselves more, run a more professional company and attract larger, more complex projects with this modern fleet of equipment. Lesson learned: Being cheap is really expensive!

Doing complicated work without the right skilled trades
As landscapers we have a short window to make hay. Customers are often buying with instant gratification in mind. We all have crews that are best suited for specific types of work — be realistic about this. I remember one year we had two supervisors; one was incredible, the other not so good. We had two complicated projects to work on at one time. I made the mistake of spending my day with the superstar supervisor, setting up a new job. Meanwhile at the other site, the mediocre supervisor was pouring a concrete pad for a flagstone patio three inches too high — that was expensive! I have had more of these situations happen than I care to remember. Do not overbook your company’s skills, and never take on work that is outside of your skill set. Instead, consider a great subcontractor to manage work outside of your own expertise. Lesson learned: Understand how many hours of work you are selling, and don’t sell more than you have available. Level the workload if you want to work efficiently.

Hiring the wrong subcontractors
Before we started building our own gunite pools and spas we hired subcontractors. I had a great opportunity to build a landscape project, but it included a concrete spa. I decided to hire a start-up pool company who had a price that was $5,000 less than the others, and he could start right away. He was basically a man and a pick-up, and I should have known better. He built a concrete shell, but in the process he must have either forgotten to install some plumbing lines, or he may have broken them while pouring the concrete. I had paid him $15,000 of $22,000, and he disappeared. I had to jackhammer the spa out and start again. That’s how I started building pools and spas. Lesson learned: Never hire subcontractors based on price. Always work with reputable companies when collaborating, even if there isn’t much room for mark-up.        

Mark Bradley is president of The Beach Gardener and the Landscape Management Network (LMN), based in Ontario.