Publications

Articles

The Cowboy Way
Reconciliation of Monthly Receivables

The Cowboy Way

It's cold and wet outside. Been that way for weeks. Not bitter cold. But just cold enough to run down business in a fit of rainy days that makes the ground open up and swallow a pump all the way to its axles. So nothing is moving because almost nothing can move in these dog days of winter.

Winter is not easy on pumpers. Your pumps may sit like fossils, remnants of what seems an eon ago when they roamed the skylines of your city handling the pours of the best contractors. Now those are just memories on a bleak and drizzly afternoon when the yard shimmers in greasy puddles and the iron sits unmoving like the pyramids of Giza. You have a lot of fixed costs. And the longer the slow down, the more intense the frustrations.

You sit in your office trying to squeeze money from the reports, statements and summaries that all say you need more money for the work you have done... and you need to work more. The rain beats against the windows, while the shouts of idle operators rechecking their pumps or just acting up echo through the quiet dispatch room. You're edging toward a decision you have resisted since the first crisp days of October... to slash prices.

Meanwhile... over yonder at the black bar X

The competition across town is facing the same dilemma, idle pumps and mounting bills. Your Competitor calls in his salesmen, who tells him that shooting down prices will bring more work. The "boys of summer", those 'we got all the work' good time guys, now seem like desperate gunslingers ready to slip a few rounds into the competition's best bets.

In better times, the boss would probably tell his sales staff to work on the jobs, not the prices. But today, after looking at the last income statement and the cash balance, he OK's a price cut.

So, sitting at your desk, you just feel what's going on over there. You figure there are good jobs to be had if you'll OK a cut... a cut at a buck-a-yard and a price per hour that will hit you like a .357 hollow point to the head. But it would be work. It would be some kind of promise of cash flow.

You know you can't make it on dramatic price cuts. At the same time, you can't last much longer without some increase in the money going into the bank account.

A few years ago..these lines had some pretty chilling reality to them. And you can bet that even in the boom times of the late 90's it's happening again to some extent, and will be so much worse when the dreaded slow down hits again. So instead of looking at the problems lets look at the causes. What is happening here?

Understand the Problem and Beat the cycle!

In non-heavy freeze regions, where price competition forces firms to compete on a job to job basis of quoting, price quotes tend to fall into the spring. Price quotes rise when owners finally tell sales people to push things up because equipment is heavilybooked. Then, in the winter, prices fall again into the late spring.

The truth is prices lag reality, because owners and managers don't always see the lag. Bid jobs and quotes can lag work by as much as three to four months. Most owners and managers are too busy taking care of business to deal with this. Even if they do, they are carried into the cycle by the local amateurs (the cowboys who pump concrete as if it were Zen meditation) without reflecting on the economies of the iron.

Don't let your winter business become a showdown. The blood in the streets will not just be theirs.

Concrete pumping is one of the most highly capital-intense construction service businesses around. So if your competition is run by drug store cowboys, you must learn to ignore them or at least avoid meeting their prices. If you take part in the price wars, you're going to do a marginal business.

Winter price cuts are like shooting from the hip. A panic reaction to a foreseeable situation. In reality, a great many of tomorrow's prices were set months ago. Your most important clients are likely to plan today for projects that won't bear fruit until months later.

Historically, concrete pumpers are terrible planners and, therefore, easy victims of clients who wait for mid-winter panic.

How do you avoid this situation? What can be done to beat this squeeze?

The answer is to think ahead:

1. Plan
In the early fall, begin to plan for the winter turndown. Divide your customer base into those who are asking for future quotes and those who are short-term planners. Deal with them accordingly. You can do marginal work in slow times, but you cannot afford to bid marginal prices that will haunt you into the spring and summer.

2. Know your costs
Calculate what it costs to pump concrete. Estimate a break even point. Make your estimate pour-specific, if possible. You should be able to ask the question 'Did I make any money on this job,' and have a reasonably accurate answer.

3. Develop a pricing policy and strategy
Work with your sales staff to develop a long-term pricing policy. Listen to their concerns about the competition, but instill in them an understanding of the lag between big jobs and work on that job. Keep them thinking into the future. Second, every sales person should learn the meaning of cost. Your sales staff should learn to associate the revenue received from a job with the cost of doing that job. If they know what it costs to pump concrete, they are less likely to push for pricing policies that fall below the break-even point. And, they are more likely to help your customers understand what it takes to operate your equipment.

4. Reinforce your client base
Visit important clients. Talk to them about their spring and summer plans. Let them know you are thinking about how to help them during the busy times. Softly remind them of the lag they already know about. Assure them that you are pricing to be on the job, and with the service your firm is noted for. Contrast this responsibility to your competition's rock bottom prices and marginal equipment. Help your clients to realize the long-term benefits, in terms of quality service and stable pricing, of maintaining a loyal relationship with your company.

5. Remember that the bottom line is your pay check
Keeping busy at low prices is not good for the bottom line. Set some income goals. Your capital investment in plant and equipment should be paying out at no less than twice the prime rate. With all the risk and uncertainty you face, triple the prime is not unreasonable. Know what you want for income and set that as your goal. Then work backward toward prices that will achieve that goal. Income should be the deciding factor in how you operate your business. Maybe a real cowboy has the guts to hunker down, think things out, and sit tight in the face of late winter's bleakness. *Your capital investment in plant and equipment should be paying out at no less than twice the prime rate!

About the author: M.M. Muench holds a Ph.D. in Resource Economics , a Master's of Science in Economics and a B.S. in Commerce (Accounting). He has been a consultant to concrete pumping firms for over 15 years.