Episode 83: The 5 Stages Of Decline For A Building Company With Russ, Sky & Andy

Professional Builders Secrets brings you an exclusive episode with Co-founders of the Association of Professional Builders Russ Stephens and Sky Stephens, along with APB’s Head Coach, Andy Skarda. Throughout this episode, the trio delve into the 5 stages of decline of a building company, and what you can do to salvage a building company in decline before it’s too late.

 

Inside episode 83 you will discover

• The stages of decline in a building company
• How to pivot and make a change if your companies in trouble
• The key factors that cause a building company to decline
• When it’s too late to salvage a declining company
• Proactive things builders can do to prevent and prepare for financial hardship
• And much, much more.

 

Listen to the full episode to learn if your building company is in a state of decline and the actions you can take to revitalise it.

 

Russ Stephens - Co-founder

Russ Stephens is a Co-founder of the Association of Professional Builders, a business coaching company dedicated to improving the residential construction industry for both builders and consumers. Russ is a data analysis expert who has introduced data-driven decision making to the residential construction industry. Russ is also a proud member of the Forbes Business Development Council.

Connect with Russ

 

Sky Stephens - Co-founder

Sky Stephens is a Co-founder of the Association of Professional Builders, a business coaching company dedicated to improving the residential construction industry for both builders and consumers. Sky is a proud member of The National Association of Women in Construction and she was also recognised as one of 2021’s Top 100 Women. 

Connect with Sky

 

Andy Skarda - Head Coach 

Andy Skarda has owned and led businesses in South Africa, the United States, South-East Asia, and for the last decade, Australia. With 30+ years of business experience, Andy heads up the coaching team at the Association of Professional Builders (APB), helping business owners in the building industry identify and implement the skills and systems they need to be successful, without needing to go back to school or more importantly, without going bust.

Connect with Andy

 

Timeline

1:57 The clear signs a building company is in decline

7:36 Building company owners are usually in denial when their business is in decline

10:23 Is it possible to salvage a declining building company?

12:27 When is it time to cut your losses?

15:28 Avenues to pivot and make change when you know your building company is in trouble

21:14 Key factors that end up making a building company struggle

23:42 Proactive actions builders can take to prevent and prepare for financial hardship

 

Links, Resources & More

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Join the Professional Builders Secrets Facebook group for builders & connect with professional builders world-wide.

Russ Stephens:

They kind of know something's wrong, but they can't put their finger on it and the numbers shine a light on a business, for sure.

Sky Stephens:

They know things aren't going well, so when we say some people come to us too late, they're mentally done, they cannot bear to go through it.

Russ Stephens:

We know that 99.9% of builders are not crooks; they do not do this deliberately. It's exactly what Andy said – it's simply ignorance. 

Russ Stephens:

At that point, they get angry because they realise they've been working for nothing, and some of them have been doing it for years.

Andy Skarda:

If you even think there might be a mountain somewhere in your future: www.abpbuilders.com. Click. Join. Let us help you.

Bosco Anthony:

Hello, and welcome to the Professional Builders Secrets Podcast, a podcast by the Association of Professional Builders (APB) for building company owners, general managers, VPs and emerging leaders. Here we discuss all things running a professional building company from sales processes to financials, operations and marketing. 

Bosco Anthony:

Joining us today are, firstly, Sky Stephens, Co-founder of APB. I’m excited to have you on the show again, Sky.

Sky Stephens:

Thanks, Bosco. How are you?

Bosco Anthony:

I'm doing well. And Russ Stephens, Co-founder of APB. Thank you for joining us again today.

Russ Stephens:

Hey, Bosco, it’s good to see you as always.

Bosco Anthony:

And my friend, Andy Skarda, Head Coach for APB. There are always great times when you're on, so I’m really excited to get into it today.

Andy Skarda:

Thank you for having me. It’s nice to be here.

Bosco Anthony:

Today's theme is around the five stages of decline for a building company, and I think it's a really timely topic. So I'm going to hit you with my first question: when do you know when your building company is declining?

Russ Stephens:

That really depends on how good a builder's KPI dashboard is. By that, I mean how well they are monitoring their key performance indicators. This is the first thing that we set up our private mentoring clients with because it enables both the owner of a building company and also APB’s executive coach to look at the lead and the lag indicators for the building company. So to answer your question, a professional builder who is monitoring their lead indicators, which relate to marketing and sales, will know months in advance before their building company actually goes into decline.

Russ Stephens:

However, it’s different for a typical builder who only monitors their lag indicators, and by that I'm referring to revenue, gross profit and net profit, otherwise known as what we call history. Those guys only realise they're in decline when the net profit turns negative. And obviously, at that point, it will take a few months to get the building company back on track. However, for those builders who do not have a KPI dashboard and are not analysing their monthly financial reports, they don't know their business is in decline until they start running out of cash flow to pay their subcontractors and suppliers. And that, obviously, makes it a lot harder to turn those businesses around.

Bosco Anthony:

And without the metrics, it's a really shocking surprise at the end of it too. So if you don't have the metrics, you could pretty much be surprised very quickly.

Russ Stephens:

Absolutely, and it's probably the reason why there is so much surprise and shock because they know something's wrong, but they can't put their finger on it and the numbers shine a light on a business, for sure.

Bosco Anthony:

Take me through the stages of decline for building company.

Sky Stephens:

Well, I know we talked about there being five stages of decline, but really we start at stage zero. Stage zero, to us, is potential loss on a contract. That is going to be the first sign of anything going to go wrong in a building company. When we talk about potential loss on a contract, this is what we are talking about: you've got a building contract signed, you've got your materials and labour, but the gross profit after that cannot cover the company expenses. That's when you're actually going to start making a loss on that building contract. If you are at stage zero, you probably haven't even started that contract yet, but that is your first sign of danger. It's like your warning sign that things are not going to go well if you continue down this path.

Sky Stephens:

Stage one really is where it all starts happening. It’s where you actually make a loss on a contract. So, you're actually building, you're at construction and the contract is in play and this is where you've actually started to lose money. Stage zero was before you started, and in stage one you're actually losing money on those contracts. This is really important because we're not talking about the cost of materials and labour; this is when this building contract cannot sustain the operations of your building company. So you can't pay all of your fixed expenses, which are going to be your payroll, your rent, your vehicles, your marketing, your advertising, everything that actually keeps the company going. So that's stage one.

Sky Stephens:

Stage two is when the company loses money, and this is where your building company will record an overall loss for the year, whether financial year or calendar year, it doesn't matter. Stage two is when you're actually recording that loss. Now, stage three is where you've got negative equity. The problem with stage three is you can technically still trade legally, even though you're in negative equity because new homes and new construction are cash flow positive. And because of that cash flow, you are still able to pay suppliers and subcontractors on time and that actually classifies you as trading solvent. But that's not actually the reality because you're just nothing more than a construction Ponzi Scheme. Cash is coming in from project A over here and you're robbing Peter to pay Paul. So stage three is focusing on negative equity.

Sky Stephens:

And then you get to stage four, the last of the five stages of decline. Stage four is insolvency, which you reach when you are no longer able to pay your invoices as and when they become due and payable. So you can no longer just rely on all that positive cash flow coming in from the new contracts and new projects that you're signing. Stage four is the point that you're actually classified as being insolvent. Now, obviously all the stages leading up to this are not good, but stage four is pretty dire.

Sky Stephens:

Stage four is insolvency, and as soon as a building company reaches stage four, this means you're no longer able to pay your invoices as and when they are due and payable. So no longer can you rely on all of the cash flow coming in from your new projects to pay off all those other debts. Stage four is insolvency; this is when you're classified as being insolvent and you can no longer trade. So rather than being stages 1, 2, 3, 4, 5, we've made it stages 0, 1, 2, 3, 4.

Bosco Anthony:

I've got to ask a question, and this is a hard one too, but are building company owners usually in denial when it comes to this decline stage?

Andy Skarda:

I'm going to jump in on this one, Bosco. I would say in 95% of the cases, no, they're not in denial, they're in ignorance. We always differentiate here between a professional builder and a builder, so let me start with a builder. In most cases, for a builder who hasn't had the training and the development that they need around running a business, they will tend to look at their bank account as the indicator of whether or not they're doing well. Sky's done a magnificent job of sketching those different stages for you. If you think about it right through from stages zero to three, the bank account still looks like you are okay, but it's like one of those Aero chocolates, it looks solid until you bite into it and then it's full of holes. And that's the problem.

Andy Skarda:

There will be a small percentage of building company owners who know they're in trouble and stick their heads in the sand or try and trade their way out of it, which I know we'll probably get to talk to a little bit later in this discussion. But my experience tells me that this has been overwhelmingly because they don't understand those five stages, and most importantly, they are not tracking their financial results well enough.

Andy Skarda:

Russ did this so wonderfully earlier, he just threw in the word ‘history.’ That's such a critical word in this discussion because if you think about it, even if you are getting financial results, if you are getting them two weeks after the end of the month, potentially a whole bunch of things happened six weeks ago about which you can do nothing other than take remedial action now to try and turn it around. So the emphasis here has to be that you've got to have the data and the information to be able to see what's going on, and you've got to understand what that's telling you. If you haven't had the training to be able to do that, you are not in denial, you are simply unaware of the fact that you're actually in liquidation.

Russ Stephens:

Just to add to that as well, I think we should emphasise here that 99.9% of builders are not crooks; they do not do this deliberately. It's exactly what Andy said – it's simply ignorance. But the trouble is, they get labelled as crooks; you've only got to read what the public perception is. I think we're always at pains to emphasise that builders are just as much victims as everyone else when a company goes down.

Bosco Anthony:

Can a building company decline be salvageable at all?

Russ Stephens:

Absolutely, 100%. I say that with such conviction because APB has helped to save hundreds of building companies that we know about and probably hundreds more that we don't even know about. The reason I say that is because that is what so many builders continue to tell us year after year. They say to us, “My building company would not exist without APB.”

Russ Stephens:

The reason they say that is because they were doing the equivalent of flying a plane in complete darkness with no navigation equipment. It's like someone just popped into the cockpit and said, “You realise there's a mountain ahead, don't you?” And because of that, they were able to course correct and reach their destination safely. But when they look back, they know they were heading for a nasty crash; they just couldn't see it coming at the time. But yes, to answer your question, even if they are losing money to the extent they have no equity left in the business, and like Sky said, they're trading with negative equity, as long as they have cash flow and the determination to survive, they can be safe. But obviously, the longer they leave it, the harder that job becomes.

Andy Skarda:

I just want to jump in on this because this is so critical. One of the things that I find myself saying over and over and over in the Private Mentoring program is, “I wish they'd got to us sooner.” That’s because there are some of them, that by the time they get to us, unfortunately the die's already cast and it's gone too far for us to be able to turn it around at that point in time. So I just want to underline what Russ is saying, if you even think there might be a mountain somewhere in your future, www.apbbuilders.com. Click. Join. Let us help you because we don't want to see this happen to any builder ever.

Bosco Anthony:

At what time do you cut your losses as a building owner?

Sky Stephens:

Well, I think this piggybacks onto what Andy was just saying, that there does come a time when it can be too late, but what Andy was talking about is it can be too late to salvage the company. I think there's also a period where it can be too late to even save the owners. You may have been going through a decline for years – it doesn't just happen overnight, this takes years and years to happen, it can be months if it's particularly bad, all these awful contracts, but it doesn't just happen overnight. So it's not like a total mystery. You know things aren't going well, you may not have all the data in front of you, but you know things aren't going well. So when we say some people come to us too late, they're mentally done, they cannot bear to go through it.

Sky Stephens:

I think this is what Russ said before. I think you asked the question, Bosco: can a building company in decline be salvageable? Of course, it can be, but it is 150,000% up to the owners of that building company. Do you have it in you? Because it is a lot of work. My goodness, it takes tenacity like you've never seen, to actually do it. It is possible, but it's not easy. We've talked about this so many times on the podcast: what is worth having that is easy? A lot of things are difficult, but this is extremely difficult, this is just different.

Sky Stephens:

You asked the question: at what point should you cut your losses? There's a really good book by Seth Godin, called The Dip. It's a super short book, probably about 50 or 60 pages. He talks about this quitting point, and before you enter into anything, work out what your quitting point is. If you don't achieve X, Y and Z by what date, when are you going to walk away? I think if you talk about cutting your losses financially and in the company and legally everything like that, you've got to seek expert advice, actually get help and work out where you are financially and legally, what your obligations are and where you actually stand.

Sky Stephens:

To answer this question from a mental point of view and mental standpoint, at what point should you cut your losses? You've got to decide because if you're going to say, “I've self-diagnosed. Here's where I am on the five stages.” If you've decided that you want to be better and get better, then you have to actually commit and do. You can't afford to change your mind or even have a few off days or a week because this is going to be hard. But if you can get through to the other side, when you even just start seeing that glimmer of light, it spurs you on and you can keep going.

Sky Stephens:

But at the point at which you cut your losses after you get your expert advice and obligations and you've worked out everything like that, that's when you've got to be really honest with yourself and ask, “How much can I take? What's my quitting point? What am I willing to put in to turn this around?” That's way more dependent on the individual running the company, to be honest.

Bosco Anthony:

How can you pivot or make a change if you know your company's in trouble?

Andy Skarda:

I think this goes back to the thing we often talk about: if you want to be able to sit under the shade of an oak tree, the best time to plant the seed was 20 years ago. If you didn't plant it 20 years ago, the second-best time is today. So the reality here is, if you are self-diagnosing or if you're even worried that there might be a mountain somewhere in your future, the sooner you start taking action, the better.

Andy Skarda:

Now, Russ and Sky have done a wonderful job of really highlighting the fact that there are two things that have to be in place if you're going to pivot. One, you have to have the intestinal fortitude, you've got to have the guts to literally muscle through this because this is going to be six to nine to 12 to 18 months of really hard work. And I think Sky made the point beautifully: it's not that complicated, but it's not easy. So it's simple in terms of explaining how to fix this, but it's not easy to do, it's going to take a lot of tenacity and a lot of investment, and you need to be sure that you're up for that challenge.

Andy Skarda:

Secondly, it's critically important that you get the data side of things sorted out, that you're able to accurately see where the business is. I can think of a case recently where the data that was being presented to the owner of the business was, in fact, incorrect. And because of that, to go back to Russ's analogy, the radar wasn't picking up the mountain because it was looking in the wrong place. So it's critically important that those two things are sorted out. Whether you do that through somebody like us and you get involved with a coach to help you or whether you get to an accountant and you make sure that you understand what the numbers are telling you, as long as you've got the will and the data, you can absolutely pivot; that's the point. And the earlier the better, is when you need to pivot.

Bosco Anthony:

Can you tell us about a building company that shut its doors and what were the key learnings from that experience?

Russ Stephens:

Quite a few years ago, I was asked to perform an audit on a building company that was part of a franchise group, and that was triggered after some subcontractors had complained about not being paid. So I took the journey down to see them and rocked up and from the outside everything looked good. They had a couple of nice cars for the directors outside being valeted at the time. They had a nice logoed-up car for the salesperson, there was a couple of V8s sitting there for the supervisors and the project manager. When I walked into the office, a lovely modern office, a receptionist greeted me from behind the counter there. It looked like a really good company and it needed to because they were doing high-end custom homes.

Russ Stephens:

I then spent the rest of the day doing the audit, and by the end of the day I'd calculated that the company was actually a million dollars underwater. So that's to say, their liabilities exceeded their assets by $1 million, and if the company had been wound up that day, suppliers and subcontractors could not be paid. Now, when I shared this information with the owners, they were quite nonchalant about it, quite casual. They said it was no problem, they had another business and they would simply put more money in. I thought that was quite a strange reaction because I'd be hitting the panic button if I had just found that out.

Russ Stephens:

But the next day when I got back to head office, I found out why they were so casual. Apparently, they'd spoken to head office and fell about laughing at the whole episode. They said I was an idiot and there was no way that they were putting any more money into this company, they didn't need to, and it certainly wasn't a million dollars underwater. So they asked me. They said, “What should we do?” And I said, “Well, the only thing you can do – you've got to terminate the franchise because they will go under.”

Russ Stephens:

Six months later, the GFC hit and it hit hard, literally in this particular area, signed contracts that were due to start were being ripped up and people were not starting. And obviously, that just hammered their cash flow overnight; it was like flicking a switch off. Three months later, the company folded, and it happened incredibly fast. It doesn't normally happen this quickly, unless there are other influences. But the interesting thing was that, when the auditor's report came out, there were actually $1.5 million in debt. So just in that period of time since I'd done the audit, which was nine months prior to them being folded, they'd lost another half million dollars. So you can see how this accelerates and just gets worse.

Russ Stephens:

The key learning here was that neither they nor their accountant knew how to calculate work in progress, which is probably the most important calculation in the construction industry. And the reason why the accountant got this so wrong is because this calculation is very different in construction to manufacturing, and that's how accountants are typically taught. So therefore, because they had cash flow, they thought everything was okay, and as a consequence, they didn't course correct, and as a result, they ploughed right into that mountain. 

Russ Stephens:

So when Andy mentioned earlier that directors were acting on bad information because they had the wrong information, that is a lot more common than a lot of people may realise. In as much as 90% of builders doing new construction, their financials are actually incorrect, so this is a massive problem in the industry.

Bosco Anthony:

What are some of the key factors that end up making a building company struggle?

Sky Stephens:

There are so many factors. Every episode this industry is not easy, so it's not as if it's one thing that makes every building company go down. Obviously, work in progress is, of course, important, but to make a building company struggle, it's systems first and foremost. It's a lack of robust systems, the lack of the ability to scale systems to a building company from where it started to where it is today. I think it's financial knowledge as well, like Russ and Andy have so eloquently already gone through. It's the data in front of you and if you don't have that financial knowledge and financial understanding, that is going to make you struggle to run, operate and grow a building company.

Sky Stephens:

But then I think as well, it's also support, maybe the word community in there as well, because at the moment, unfortunately, it's not a particularly open community, the construction industry. It is a bit isolating and knowledge isn't shared as freely as it could be. And so I think without having some connections to so many other professional builders, you're all just operating in your own silo. We've heard this so many times, but it can be quite lonely being the owner of a building company; there's no one else to talk to. You don't really know if you're doing it right or wrong, it's just a few throwaway conversations with some acquaintances that you used to work with or for, but it's not as open.

Sky Stephens:

And so really, without all three, without financial knowledge and expertise, and systems in the building company, but then the community and support, you really can struggle if you lack in any one of those areas. Because I truly think you need all three to operate a successful company, or at least continue operating a company with the thought of it being successful and professional.

Russ Stephens:

Marketing as well is so important because if you don't have good marketing, you're not going to generate the number of leads that you need and you become dependent on the leads that you get and you become desperate. When that happens, you cut your margin to make sure you don't lose those leads. So that can be a key factor that ends up in building companies struggling for sure.

Sky Stephens:

Yes, 100%. Your marketing systems, your sales systems, that you're even increasing your margins throughout the build. That's a really good point.

Bosco Anthony:

What are some of the things builders can do to prevent and prepare for this financial hardship? Are there any proactive things that they can do?

Andy Skarda:

Do everything Sky just said. Simple.

Sky Stephens:

Simple.

Andy Skarda:

Yeah, simple. Easy? No. I think we've probably touched on all of these in different ways throughout this episode, but the reality is, step one, I think would be to get those financials sorted out and be able to read, as Russ has alluded to, both your lead and your lag indicators. You've got to be able to predict not only what's going to happen on the jobs that are currently being built, but you've also got to be able to see that you've got a solid pipeline of work at the correct profit margins into the future. 

Andy Skarda:

You asked a question that Sky responded to earlier: When should you cut your losses? When do you pull the plug? Well, the answer is quite simply, if you are doing what Russ has alluded to because your marketing isn't right and you're cutting future margins and you are already in trouble, unfortunately you haven't turned that thing around at all, you are just heading deeper and deeper into a hole.

Andy Skarda:

It's critically important that you get data on that lead flow, not just the number but the quality. Are you talking to the right people who will be able to pay the money you need in order – and I think this is really the answer to your question – in order to be able to start building those reserves? The reserves fall into the three categories, as Sky mentioned: we need emotional reserves, we've got to see the light at the end of the tunnel and not believe that it's an oncoming train, it's got to look like, “I can keep pushing through this because it's worth it in the long run.”

Andy Skarda:

Number two, you've got to make sure that you've got the financial reserves, and those reserves may be required to be used in various different ways depending on what the situation is in the business. And then I'm going to go all the way back up the funnel and say, you want to make sure that you've got the sales reserves, that you have more work in front of you than you can complete. So if you've got more work, that allows you to be significantly more picky about what you do, that means you can cherry-pick the jobs with the biggest margins, and the bigger the margin, the bigger the spade you get in order to dig yourself out of the hole.

Bosco Anthony:

What's the mindset of a builder that's going through a company decline, and how does APB help someone going through this? You talked a lot about people who have come to you in the past who have been in trouble and you've helped them, but take me through their mindset and how you guys help them.

Russ Stephens:

Well, I think that really depends on the stage of decline that they're actually going through. If we think back to stage zero that Sky described for us, and that's where they've signed a contract and the gross profit on that contract won't cover the fixed expenses. The mindset is just to get started. In a lot of cases, they're not actually thinking about the consequences of starting this low margin contract and maybe in a lot of cases, not even aware that this isn't going to cut it, this isn't going to cover the fixed expenses. So the mindset at that stage is just to get started.

Russ Stephens:

When you look at the next stage, which is when those losses have actually been realised in terms of the fixed expenses exceeding the gross profit on that particular job, a lot of the time, the mindset is, “Yeah, but.” For example, “Yeah, but I won't have those problems next time.” Yeah, but that's not going to happen. Without actually making any changes to their own processes, they just think it is going to improve, and obviously that's the definition of madness I think as well.

Russ Stephens:

We could go through every stage and say there's a different mindset as to how they address the problem that's occurred, which to a certain extent, you could even say, is a little bit of denial. But when we get to the end, and I think that's probably really where the question is coming from, it's desperation, because at that point, this is where they are trading insolvent and they've gone beyond using up all the equity in the building company. The situation is beyond desperate. They're getting chased for money, the phone doesn't stop ringing, subcontractors are not turning up on site. If they do turn up, the materials haven't turned up because the bills haven't been paid. It's absolute desperation.

Russ Stephens:

And these guys are working flat out round the clock trying to connect the dots, trying to make it work, and they just don't realise that what they're doing is futile and will not fix the problem. It really doesn't matter how hard they work, they will not get out of this situation by working harder. Or even if we look back a little bit earlier when it first starts to happen, they're not even going to get out of it by taking on more work because all those things – taking on more work and working harder – just prolong the situation. The death of a building company is extremely slow and painful.

Russ Stephens:

In order for APB to help someone through this, as Andy said, we show them the reality of the situation, the cold hard facts, which is their financials. At that point, they get angry because they realise they’ve been working for nothing, and some of them have been doing it for years, and that's not a flippant comment, that is a fact. There's a lot of building companies that run on a loss for years without even realising it.

Russ Stephens:

But once we've shown them the situation and they have become a bit angry, we then show them the path to get out of the mess. That's key because I feel depression sets in when you can't see the future, so not only do we create a clear picture of what the future looks like, we also give them a clear pathway to follow that's going to get them there. It's not easy, but I've got to say some of the best businessmen and women in our industry have emerged from this experience.

Andy Skarda:

I think, Bosco, Russ isn't taking it as far as I'll take it. What happens often with these people is that when they see the path out, all of a sudden there's hope, and hope is the key. If you have no hope, you won't have the reserves that Sky mentioned earlier to be able to pull this thing through to where it goes. If you can see that you are going to get to a finish line and from then on can see that there's clear water ahead, then you can put in the mileage that you need to, to get it done. So that's really the critical thing, to move that mindset from depression and giving up into, “No, this is doable and I've now got the help and the resources around me that'll get me through that process.”

Sky Stephens:

And that's the difference though, isn't it? Because going from that dire depressed mindset, you're very anxious about it, to then finding that hope, is because you’re getting support and bouncing it off someone and actually having that path forward. I think a lot of the time as well, the realisation and a lot of the hope comes from realising that that plan is all based on solving the root cause of the problem, not treating all the symptoms that they were doing or that has been tried for the last couple of years.

Sky Stephens:

But I think it's worth us taking a minute because, honestly for what, 25 minutes, all we've been banging on about is how hard it is, it's really hard, it's awful, you've got to be able to go through it. Make no mistake, closing down a building company because you went into liquidation or voluntary administration is far more painful. We can all attest to that. When you see people go through that, it is far more painful, it feels so much worse than if you have the mindset to get through this.

Sky Stephens:

And you guys correct me if I’m wrong here, but if you were to ask all those building companies that we've mentored and worked with and stood by for all those years to get through it, if they were in a decline to actually get to the other side and you ask them, “All that work, was it worth it?” I don't think anyone's ever replied, “No, I wish it just went in decline, I think it just went the other way.” 

Andy Skarda:

I'll back you 100% on that; we've never had someone say that. I can't see why we would because, of course, we're focusing on the dark side of this industry primarily with this. But we've got to understand that once these things get fixed, this is one of the most incredibly rewarding and fulfilling positive industries. When you are building homes that you are proud of for people who love them and you're earning enough money to build the reserves in your building company, I don't know whether it gets much better than that. So the reality here is, I want to make sure that we balance this equation, Sky, as you've just said, it's worth it in the long run, as long as it is salvageable, that's the key.

Bosco Anthony:

Is it too late to salvage a decline company? Does it look like the further the stages are, the harder it becomes? When do you say, “It's too late”?

Sky Stephens:

Of course, it's like treatment, and I think going through this just a little bit earlier, every building company is salvageable if you have that mindset. Once you have the right data in front of you, and I think what you've just said in that question there, you've rephrased it from what we've talked about earlier in this conversation, and you’re asking is it harder to turn it around, the deeper into the stages you are? Of course it is, but that is why by getting the data as quickly as possible so you know exactly where you're at, you have a better shot, even if you just feel like something's off, something isn't as good as it could be, even if you're at the stage that Russ mentioned, at stage one where it's an actual loss on a contract.

Sky Stephens:

When you ask, what's the mindset around that? It's the ‘Yeah but.’ It can always be explained away. “The only reason was because of this or because of that, or because this happened, don't worry, it's not going to happen again.” We've heard this so many times. If it happened once and there's no system in place so that it will not happen again, it's going to happen again. There's fundamentally something wrong, so you’ve just got to have the open mind to actually go and look for a long-term sustainable solution for the company, not, “Can we put a band-aid on this little booboo?”

Andy Skarda:

Your point there is so valid. It's only when you get the right systems – that you spoke about earlier – in place that you get to have the conversation two months in a row. I'll let you get away with, “Yeah, but it won't happen again,” the first time. But when you come back to me a month later and we look at your numbers again and the same problem exists, you've used up that get out of jail card. Now even you cannot deny the fact that you have a real problem that needs to be resolved.

Andy Skarda:

But if you don't have those numbers and if you don't have that level of accountability in the relationship where the numbers are being checked every month and you’ve made sure that whatever you've done has turned that thing around, you literally end up in a place that you just start to work through these different stages of decline very quickly.

Bosco Anthony:

For those owners who are going through this struggle, would you say that the financials are the first primary focus? What should a company owner focus on when it comes to that stage?

Andy Skarda:

Yes, because that's where it's reflected. This is something that we are at great pains to explain to builders, particularly when they find us for the first time. Our goal is not to turn them into accountants, it's to get them to understand the story that the numbers are telling them. And they're not just financial numbers, they are things we've spoken about, the fact you need to be watching your marketing results, you've got to be looking at that funnel to make sure that you are getting regular inquiries. You've got to be measuring those inquiries, not just from a quantity perspective, but also from a quality perspective. So it's not just hard cold financial numbers, but the truth is, in any business, everything you do is reflected in your numbers.

Andy Skarda:

I heard this beautiful quote yesterday, every single business is engineered to achieve the results that it does. That is just such a wonderful quote.

Sky Stephens:

That's so good.

Andy Skarda:

Essentially, what that's saying is, if you are not getting the financial results out of your building company that you want, well, then we've got to re-engineer your building company, and the sooner we get into that, the better. It's not just financials, but that's probably where we are going to first start to dig. And we spoke about those stages of decline, we are going to work those backwards, we're going to look to make sure that the contracts are delivering profit first. Because if they're not delivering profit, you haven't got any hope of getting net profit out of the business. It's literally taking those things apart and then looking at each of them individually and then putting them back together in a way that's going to give you a different outcome.

Sky Stephens:

I’m going to piggyback onto that, and just explain it as well. We've all said it's going to take a while, but if we can just put into words why realising the changes you've put in place in this industry takes a long time – it’s because you are sitting through it.

Andy, you and I talk about this most weeks, I swear, in a lot of our meetings, but a lot of clients who are coming into mentoring and working one-on-one with our team, they always have to say, “I just need to get through all my rubbish contracts.” It’s because you're sitting through all of the rubbish going through and you are working on the company, you're doing marketing, you're improving your sales process, you are signing contracts at higher margins, and they're all immediate wins; they're implemented. But to realise any of that, you need to get through all of your rubbish contracts for a while, because that new contract you signed probably doesn't start for eight months, nine months, 12 months. 

Sky Stephens:

So you just need to hold out and you need a plan to hold out. How long is it going to take for you to get through all that rubbish so you can get to the good one?

Andy Skarda:

This is really the flip side of what we were saying earlier. Be careful about becoming busier when you start to think you're in trouble. The reality with that rubbish is, if you keep taking on jobs that are going to run at a loss, it's not just the fact that those jobs are running at a loss, it’s also that you are using available capacity that now cannot be used in a job that is going to generate real profit for you. So it's that opportunity cost that you're also losing out on if you continue down that particular road.

Andy Skarda:

Really, as we are talking, I'm thinking about two wonderful human beings in Western Australia who came to us with two contracts signed, and they were very proud of the fact that these contracts were ready to go, until we looked at the margins. And you know what? I've watched those two people literally work for the last 18 months to get those things out of their hair. But I'll tell you what they've done, they've used them to learn from and they are now sitting in a completely different place, they're now sitting in a place where they've got contracts lined up that are at good margins and are ready to go, and they will never ever make that mistake again.

Andy Skarda:

That's the key here, we often talk about management philosophies, and the growth mindset says: if we are going to fail, then let's fail forward, let's at least take the learnings that we can get from the mistakes we've made and not repeat those things again, change those systems. As Sky said, go in there, find out what led you to that place, turn it around, start again. The next one that comes in is going to be better and better and eventually, the rubbish is out of the system and it's clear water; it's beautiful.

Bosco Anthony:

If a company is declining, and we've talked a little bit about the mindset, we've talked about the owners, we've talked about the systems, let's talk about the people inside the company. Let's talk about how do we take care of the people affected by this crisis long term?

Sky Stephens:

Well, first and foremost, it’s very much like when you're on a plane and they say: in case of emergency, oxygen masks are going to drop down in front of you, secure your own first before helping others. I don't want this to come across as selfish in any way, I do want to put a caveat on exactly what I mean by this. But your building company quite literally takes care of so many people. 

Sky Stephens:

You’ve got employees, you’ve got contractors and subcontractors, and you’ve got clients. But not only that, all of your employees have families and responsibilities, and clients have families. There's a ripple effect here, which is crazy. So first and foremost, you always have to be protecting the company. So when I talk about putting your own oxygen mask on first, you have got to be in the right head space, you have got to be able to take care of yourself so you can do what is right for your company because your building company takes care of so many people.

Sky Stephens:

That's what I mean by putting your own oxygen mask on first, protect your energy, your company and how you are going to get through this. Get help, get professionals on board, get that advice, get a plan going and protect this company. But then like anything, we've talked about this when COVID hit and everything was changing in the world. What was the one thing we kept saying over and over again? We were talking about communicating; you want to communicate situations to people.

Sky Stephens:

Now, I'm not saying you need to go out and say, “We're in a really bad situation, everything is terrible, blah, blah, blah.” But when you are proactively making changes, give them the why, tell them why you need to operate more efficiently. “We're going to put this in place because of this, that and that.” We need to get way better at our communication. If you are just working like a crazy person to take care of everything, but you cannot communicate why that's important to anyone else, do you think anyone on your team is actually going to help and pitch in or really understand why you're doing what you are doing? So, the communication part is so important as well.

Andy Skarda:

I think just to amplify what you’ve just said, we had a recent case where there was a pretty serious case of decline, et cetera, and the building company owner really didn’t think that his team was going to respond well to what was going to be needed in order to fix it, until he actually spoke to them. And what he found was in fact completely the opposite, that as soon as he communicated clearly what had happened and why and what was going to be needed to fix it, everybody rolled up their sleeves and got involved to turn it around for the exact reason that Sky's just mentioned, because they all have a vested interest.

Andy Skarda:

That supplier and those subcontractors that Russ spoke about earlier, where the guys wouldn't come to site anymore because they haven't been paid and the materials haven't been delivered, that's because of a lack of communication. You need to be honest with people and tell them where you're going. Here's the beauty of the plan: once the plan has been worked out, we can tell you to the day when people will get paid.

Andy Skarda:

Literally, you can give somebody a payment schedule for the next 12 months that says, “I will pay you this amount of money on that date,” and what they can see is, it's actually in their interests to help you through this process because they will end up in a far better situation by the end of it. Communication is critical, and we're not saying go and air your dirty laundry in public, but what we are saying is, make sure that you're able to clearly communicate what the problem is and what you are doing to fix it, to everybody involved with the business.

Russ Stephens:

That shows good leadership, doesn't it? When we have this clear communication and articulate what we're going to do, we instil confidence in our team and they can follow. But the exact opposite happens when you don't have that communication, it feels like a rudderless ship and people are looking to jump overboard.

Sky Stephens:

People aren't stupid; people know when things aren't right. People hear the whispers, “You haven't been paid such and such, the payroll was late, materials weren't paid on time,” and people talk. So people aren't stupid, people know what's going on and it's not going to give you any support, so they're going to go looking elsewhere.

Sky Stephens:

Think about it genuinely, everyone listening to this right now, think about how many interviews you've done when you're hiring people. That key question when you're asking is, “Why are you looking to leave your current company?” How many times have you heard what's happening at the company, whether things aren't running right or there's been a lot of redundancies. No one at their company is communicating about what is happening, and so they just need to look elsewhere or it doesn't feel so secure, they're going over here to find a new job. People know, so you've got to be able to communicate and actually instil confidence, and it's a skill in communicating your plans.

Andy Skarda:

As we are talking, I'm just thinking about how many husband and wife teams we have who run building businesses together. In case there is somebody listening to this where this is a very real part of your life, you need to understand that this is not the time to alienate people around you; this is the time to be honest. This is in fact where you need to be hugging those people who are close to you a lot more than what you normally do because they're also scared. It really is one of those things where the damage is not just to the building company or to individuals, but it can seriously damage relationships, marriages, et cetera. And obviously, we don't ever want to see that happen, if it's avoidable.

Bosco Anthony:

For our listeners out there, what are some of the resources available to help builders in trouble?

Andy Skarda:

I've got to get in, of course, it's www.apbbuilders.com. But seriously, if we are not the right solution for you for whatever reason, and we fully accept we aren't the right solution for everybody, the key is, get help from the right people. So if it's financial help you need, I always talk about finding an accountant who has the heart of a teacher. If your accountant, or for that matter, any professional service provider cannot explain themselves to you in language that you can understand, find another one. 

Andy Skarda:

At the end of the day, it doesn't help you that people are using terminology and language that goes over your head. That's not in any way to say that anybody listening to this podcast is not intelligent. I keep going back to this example: I have absolutely no idea how to crochet, none whatsoever, not because I'm unintelligent, but just because nobody's ever taught me and to be honest, I haven't really been that interested. I could have learnt on YouTube.

Andy Skarda:

But the point I'm trying to make is, not understanding things does not mean that there's something wrong with you, it just means that the manner in which it's being communicated to you is not right. So go out and get the help from a professional. Obviously, at APB, we have a range of resources available. There's a ton of free stuff on our website, we give away incredibly high-quality content that'll help builders through this thing. There's a wonderful article on this exact subject in our blogs that will explain a lot of the detail behind what we've covered today. And obviously, one of the things that gives us as a company the most intense satisfaction is when we are able to help people turn these situations around.

Andy Skarda:

Coming on board as a member, obviously is step one, that gives you a bunch of information. If you are further into the process and you need more urgent help, getting into our Private Mentoring program would obviously be something else that people could consider. And you know what? If all else fails, buy the Professional Builders Secrets Book, because if ever you needed a Bible or a blueprint on not getting into this situation, you need that little book. I know Russ and Sky won't promote it because they wrote it and they feel embarrassed and all that stuff. But I'll promote it, that book is the Bible and the blueprint to making sure this never ever happens to you.

Sky Stephens:

They're really good points. There is one more to add to that, just to inundate everyone with resources. Andy talked about having a team around you and like a team of advisors, so check out APB’s Rewards partners. If you go onto our website, we'll put it in the show notes. Look at all of the preferred partners we have under APB Rewards because these are all vetted by APB and they include everyone from accountants and bookkeepers to estimators to different software marketing services, anything you need.

Sky Stephens:

But that's a wonderful place to start. If it's not necessarily business coaching and setting up a plan or anything like that, check out the partners and see what other resources and advisors you can find that way that have actually already gone through APB’s systems because that would be a really good place to start. And of course, if you're a member, you just get a rebate of cash on anything you do spend with them. So that’s very worthwhile pointing out as well.

Bosco Anthony:

Someone once said to me, the epic story of tomorrow can be written if it ends today. So I think this conversation has been very timely and I want to thank all of you, Sky, Russ and Andy for your insights and I look forward to sharing many more insights from you in the future.

Sky Stephens:

For sure.

Andy Skarda:

Thanks Bosco.

Russ Stephens:

Thanks, Bosco.

Andy Skarda:

I can't wait.

Bosco Anthony:

Thank you for listening. Remember to subscribe to Professional Builders Secrets on your favourite podcast platform and leave a review. To learn more about how the systems at APB can help you grow your building company, visit associationofprofessionalbuilders.com. See you next time.