The ‘holy grail’ for many small business owners/leaders associated with the construction industry over the years has been to forge a clear and successful relationship between marketing and finance. There is often a suspicion about the effectiveness of marketing and the results it generates. As John Wanamaker the US department store merchant once famously quoted ‘Half the money I spend on advertising is wasted; the trouble is I don’t know which half’.
Paid for advertising of course is only one aspect of the wide world of marketing and there are many other more measurable aspects, which we will discuss in this blog.
When people talk about finance, the subject matter normally revolves around the following:
- Balance Sheets
- Profit & Loss Accounts
- Source and Application of Funds
- Financial Ratios etc.
These are, of course, are all highly important financial issues within any well managed and prudent business. However, over my many years of working within the construction industry there are a number of significant activities that have come to the fore which can be undertaken to improve your chances of financial success. Many of the choices we make in our businesses with regard to the selection of market sectors and the clients you choose to work with can make a real difference to the profitability of your business. Get it right and you flourish; get it wrong and you struggle, under-perform or fail. This needs to happen by design, not by accident. So, what does a designed solution look like?
We at CLC have identified 8 key focus areas which bring marketing and finance together with the objective of making businesses more profitable, commercially safe and improves their cash flows.
One of the things I have really observed over the years is how many problems come to light once a project or a relationship is underway and in play: why is this? Was it because a project was priced incorrectly, have you done far more work than you allowed for in your quote, have costly technical problems surfaced or have you simply not been paid on time?
A number of the things we refer to in this article relate to the due diligence that should be undertaken prior to a project/client relationship starting.
1. Do you have ways to measure the profitability of your clients, markets or sectors?
If not, what are you doing about it? This type of data is vital for the efficient application of marketing resources.
Many SME businesses in the construction industry could quite readily tell you who their top 10 customers are by turnover. But if you asked whether they could tell you who their top 10 most profitable customers are they may not have this information readily available.
What this means is that your marketing efforts could potentially be being spent on securing low margin work. This may be acceptable if the volume is high, but in most SME businesses this is rarely the case, as they normally only have a presence in a few sectors. So the only way to get this data is to have a project management/accounting system that collects, processes and reports this information; usually starting with the completion of time sheets. As businesses grow and therefore becomes more complex to manage, this situation exacerbates the need for such a system.
After a sufficient period of collecting data it can be analysed to see which sectors, services and clients provide the best results. Where you’re best results come from, you would be wise to delve further to understand why they are better. This may provide clues into what sort of business and client types to seek out in the future. This sort of thinking provides a true link between marketing and finance. It also enables the marketing plan to be adjusted so that scarce resources are allocated in the right areas of the business.
2. How much due diligence do you do before entering into a contract with a client?
It is easy to be lulled into a false position i.e. where there appears to be the potential to gain access to a large amount work which on the face of it looks very attractive. This can of course in some instances pay off handsomely; but without the appropriate level of due diligence this can potentially be an expensive gamble. So, do your homework; find out about the following:
- Financial stability of the client,
- Payment record
- Payment terms
- Terms of engagement (the small print?).
Let’s be clear, it is not impolite to ask these questions of a prospective client!
Imagine a scenario where payment terms were 120 days from receipt of invoice. Even if the potential workload seemed considerable, could an SME business realistically be expected to cope financially with this?
3. Do you understand the client’s payment procedures so that invoices aren’t held up?
If a client requires certain information to be put onto your invoices, in a particular way, style or layout, everyone in your business who sends an invoice must be aware of this. So you need a system that helps you do it. Many invoices remain unpaid because of the wrong layout of invoices, or perhaps you don’t understand your client’s methodology for getting invoices signed off and paid.
When you are dealing with a lot of projects/clients numbers of invoices can be significant. So ask yourself whether your current system is fit for purpose. For example if an invoice is due to be sent out by someone in your business by a defined date and this doesn’t happen, does your system warn you?
If it doesn’t, cash flows can suffer significantly and cause damage to the business.
4. Do you have financial ‘Key Performance Indicators’ (KPI) which show the financial health of your business?
Financial ratios are very useful and necessary in the form of KPIs. If you need to know what these are, there is a lot of information available on the web. What you may want to consider looking at beyond these headline numbers are certain trends, such as the following:
- Who are the persistent late payers and why is this happening?
- Who are the best payers and why?
- Is the debtors list on a downward trend?
- If you use an overdraft, how close are you to the limit each month/ how can this be reduced if it is high?
If your trends show some evolving or consistent issues, it may be that your marketing activities are switched to clients who provide a better fit.
5. Do you know the ‘Lifetime Value’ (LV) of your clients and what net contribution do each of them make currently and over the long haul in terms of profitability?
This is tied back to point 1, in that you want to understand the historical quantum of business generated by each client and the profit contribution. If the numbers look good, your marketing efforts will be concentrated in generating more work from these sources. This is where marketing people make a real impact, by talking to clients about their expected workloads over the next 3 years and beyond.
If your relationship and level of service level with a client is excellent, the work is profitable and there is a healthy pipeline, you have a strong LV position. Understanding what individual clients are worth to your business is essential.
6. If you can’t charge more for your services than current market rates how you can increase your profits?
It is true to say that professional fee rates and tender prices are contained within certain parameters. It then becomes a question of improving the efficiency of your internal operations.
We have previously touched upon the need to upgrade systems and processes as the business grows and becomes more complex because of the number of additional transactions taking place. Investing in new software and hardware can certainly help you to be more efficient, but here at the Construction Leaders Club we are seeing a growing number of businesses investing in:
- Work winning skills
- Leadership skills
- Financial awareness skills
- Communication Skills
- Bid writing skills
- Customer care skills
Why is this happening? The last recession made business owners realise that their businesses had to be run in a more business like way for their businesses to survive and grow. They realised that the above mentioned skills had to be embedded in their directors, partners, associates and senior team members, to improve the efficiency of the business. Technical artisanship of itself is not enough to run a successful business in the complex business world we now have to live in.
7. Do you have reliable forecasting techniques which enable you to build a robust pipeline of attractive future work opportunities?
One of the areas we touched on in our previous article was about how to maintain a healthy pipeline of new opportunities. Do you have a system to do this?
Look at it like this:
- What is your secured workload position?
- Which known opportunities are likely to become orders?
- What other opportunities are we aware of which provides a fit?
This type of assessment will enable you to understand where marketing effort needs to be applied to move opportunities through your system to secured orders. This is why following up quotes efficiently and getting close out is so important.
Even if an opportunity is lost, there is the opportunity to seek feedback from the client or his advisors and to enquire about future opportunities. If you were to analyse the movement in the figures for the above items each quarter you can track the progress of your efforts and align your marketing and finance activities.
8. Do you have a firm understanding of future spend patterns within your key sectors or clients?
Valuable marketing time needs to be spent researching a number of key things:
- What is the economic outlook for the country?
- What is the outlook for the construction sector over the next 3 years?
- Where is money being spent, in which sectors and by which clients?
- What are the emerging trends/technologies that will shape future investment?
Spending time trying to work out what the future will look like may seem like ‘crystal ball’ gazing at times, but savvy businesses are looking at these types of information because from a marketing and a financial perspective it makes good business sense to do so. Basically it gives you the chance to get ahead of the game, be more innovative and responsive to clients needs. There is a lot of information on the web if you spend enough time seeking it out. Talk to members of your peer group, attended relevant exhibitions and conferences.
Information really is key! How you apply what you have learned is key to your future financial prosperity and makes the best use of your scarce marketing resources.
To help you further please download your FREE copy of our marketing performance efficiency tracker template.