The Kamikaze Contractor (Part 1)

Yesterday was September 29, 2008.  It was a bad day for Wall Street (the largest single point drop in its history and the 17^th worst percentage drop).  This all unfolded as the House of Misrepresentatives failed to pass legislation designed to “save” the American economy from doom and gloom.  I watched in sadness, then disgust, as members from both political hack groups-excuse me, Parties-paraded to the microphones to blame the other, like 3^rd grade school boys in a chest thumping contest on the playground.  I imagine Nero is laughing his head off right now!

As I was listening to the events unfolding on a local radio program, an air conditioning contractor called in to say that his suppliers were freezing all open account activity for the time being and that this was going to really hurt-maybe even destroy-his business. He said he had six homes waiting to be finished, each with roughly $15,000 worth of equipment and ductwork in them, and that he did not know now if he would ever be paid by the builders since their construction loans were also frozen.  My heart went out to this guy, and his call got me to thinking.

How does a contractor survive in times like these?

The Flight of Kamikaze 126

That, in turn, led me to imagine a scenario involving a hypothetical contractor, who I will simply call Kamikaze 126.  He could be any contractor in American right now, but I will pretend he is an HVAC contractor trying to survive these turbulent times.

I want to walk you through a typical panic scenario and I’ll be using an Excel workbook I wrote that I call “The Projector” to do the math. (If you’d like to download a free copy and follow along this post, click here.  It is part of my Fiscal Fitness workshop software.)

I begin by setting up my workbook for Kamikaze 126’s financial data-sales of $750,000, against cost of sales of $450,000, with overhead of $285,000 (leaving only $15,000 net profit-about 2%, a very typical, if not sad, figure for today).

Kamikaze 126 thinks, “Man, this economy is tanking!  I’m running into bids from my normally sleazy competitors that are getting ridiculously low, even worse than normal.  I’m losing my butt on bids lately.  I’ve got to stay competitive. I must lower my prices.  Gee, but how much?”

At this point, Kamikaze 126 rubs his chin and ponders this life-changing question.  After an agonizing few seconds, he settles on 10%. He’ll cut his prices 10%.

I simulate this by entering a negative 10 (-10) in cell F20 of the “What If” sheet in the workbook.  I then scroll down to see the results.  As it turns out, Kamikaze would go from a weak $15,000 net profit to a loss of $60,000!!!  At this rate of blood-letting, Kamikaze 126 must sell almost 45% more work (or a little over $1 million) just to get back to making the $15,000 he made for sure last year!

Do you honestly think that would happen?  Do you really think that a 10% cut in prices would bring in 45% more work in an economy where over half the HVAC contractors are flying their planes into the ground?

But this is what will happen to Kamikaze 126 because he let his heart rule his business and not his brains.

In the next post in this blog series, I’ll dig a little deeper into these “what if” scenarios to see if we can build a survival strategy for these times.

Please be sure your seat backs are in their full upright position and that your seat tray is up and in its locked position.  Hang on: wild turbulence ahead!