Business Plan is Key To Charting a Bright Future

Although developing a customized business plan may appear to be a daunting task, the investment of time to plan, combined with strategic direction, can make the difference between a profitable business and a failed one.

By RICHARD E. GAVIN, CPA, CCIFP

No one can predict the future. External factors can strongly influence a business’s performance in many ways beyond a business owner’s control. However, by utilizing best practices in the industry and establishing and following an in-depth business plan, a contractor can take a more proactive role and help manage his or her business better in any economic environment, making the good times great, and the more challenging times a little bit easier.

Although developing a customized business plan may appear to be a daunting task—especially for a contractor whose favorite activity is managing jobs in the field and who has limited experience writing business plans—the investment of time to plan, combined with strategic direction, can make the difference between a profitable business and a failed one. Through the years, we have worked with hundreds of contractors, many of whom have had clearly defined business plans and others who have improvised as they moved along. Though a company can be successful without a business plan, our experience has proven that those with a well articulated, strategic plan fare significantly better over the long haul.

Recently, we conducted an operational review of a construction company who did not have a well-defined business plan. For a $50-million organization, it seemed as though the business owners knew what their plan was, but never spent the time to do the necessary research and critical thinking necessary to articulate their plan on paper. Their company was profitable, but did not utilize benchmarking or other industry statistics. By neglecting to do so, they were exposing themselves to higher costs, lower standards, and mismanaged expectations. The lack of a business plan was causing them and their staff to waste time bidding projects that they had no business pursuing, managing for emergencies and unplanned events at the expense of focusing on proactive growth and taking full advantage of opportunities in the marketplace. If you fail to plan, you plan to fail, the saying goes. After the operational review exposed a number of areas ripe for improvement, a detailed, strategic business plan was created to clearly articulate its goals and to fully capture the company’s plan to achieve them during the next three to five years.

The first step in business plan development is writing an executive summary. This step required our client to come to a consensus on what were the company’s true goals. We interviewed the owners to understand the true essence of what they wanted their business to look like in three to five years. They had specific, measurable goals—including doubling the company’s revenue—they wanted to accomplish. They detailed how they would accomplish their goals (which we will discuss later in greater detail) and how they would do it in our current economic environment. We also helped them to think about what they would do if the economic environment changed and how they’d react to a steep reduction or steep increase of resources. This part of the business plan is imperative as it could be the portion of the plan that is read by a potential investor or credit grantor. It could be the section that gets the bonding that is necessary or the line of credit needed from the bank or an investor.

When we initially met, the client had educated us about their accomplishments and history in great detail. This was the first piece to their business plan puzzle. We interviewed them and captured what made their business different. They were a family-owned business; three cousins who decided to pursue their goals together and have learned much from one another. We documented their business to date, how it was started, significant milestones, sales growth and evolution plans for the future. They had a solid business and a vision for evolution. Their mission statement included a great deal about providing an atmosphere for employees that was superior to other companies. They wanted to become the go-to builder of sports and recreational facilities in the New York area and to provide their employees an opportunity for careers that included competitive pay, rewarding work, and an opportunity to advance with unlimited potential. Their vision statement, the next piece of their company description, spoke of the company with an inward focus: “J&J Contracting is one of the most successful construction companies in the NY area, with more than 140 employees, revenue approaching $100 million, a number of major projects in progress, equity of $12 million and a profit margin of 18 percent.” This vision statement presented a clear and precise view of their growth goal and what they’d like to achieve.

In the next section, which detailed their services and capabilities, we detailed what the company would provide (sports and recreational facilities), their focus (schools, private institutions, health clubs, and community centers), and how they would provide their services in a unique way (through detailed needs assessments, green building methods, interactive project management and personalized websites that tracked progress and cost). Their unique service delivery was a main focus, as it differentiated them from their competitors. They interviewed clients to find out what they felt the most valuable services were and included them in the plan.

Next, we teamed up with J&J to conduct some specific industry research and market analysis. We utilized clients, industry publications and trade organizations, and industry leaders to gain a pulse of the marketplace. We discovered some current trends, including an influx of charter school development and their needs for athletic facilities. We also examined market growth over the past 10 years, which was substantial, and barriers to entry. Through the analysis, we developed reasoning that supported J&J’s plan toward success and why their business plan would be successful. The identification of new markets and potential growth further supported this research.

We then addressed J&J’s marketing plan and their goals for growth. After deep analysis of how the company went to market, we helped them formulate specific questions in the pre-bidding process that would eliminate unqualified projects to better utilize their time and resources. We incorporated their plans for networking and leveraging current client and referral relationships. One positive we noted was the continual development of J&J’s brand. We also included new initiatives the organization was doing to stimulate growth, with the hopes of emphasizing the importance of proactive business development.

J&J’s operations plan examined the particulars of how the company operates on a daily basis, how they deliver completed projects, and detailed their policies and procedures. This included how the company bids a job and obtains pricing, procurement of subcontractors, the process of ordering materials, the process of hiring employees, the transportation of equipment to job sites, and the cash flow process. The plan was built with the intention of updates and improvements, with strict guidelines for implementing change on a global, companywide level.

We were making solid progress with J&J. Next, we focused on the financial plan. This piece is critical to the overall success of the business and for obtaining necessary credit arrangements to establish and sustain funding for the business. We analyzed the company’s capital requirement needs, funding sources, and what type of bonding program it needed. The business was on its way to meeting growth goals, but it still needed capital to support its expansion goals. We needed to identify where the capital was coming from. They had considered taking on outside investors, but decided against it for the short-term. The company had established a working capital line of credit with its bank to support the delay of collections of requisitions. Another key component that we covered was the financial projections and budgets. We prepared a full set of projections, including balance sheets, income statements and cash flow schedules to include in the plan. Finally, we analyzed the form of business entity, limited liability company (LLC), that they had chosen and identified its advantages and disadvantages. We were able to confirm that their selection of an LLC was the right structure for its ownership group.

The next section outlined the management structure of the company. J&J has three owners, who each have different functional titles: Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer. The CEO is in-charge of guiding the organization, while the other executives have more clearly defined roles. The COO is managing the dayto- day operations, while the CFO manages the company’s finances. The CFO is the company’s reality check who can detect and report potential issues based on financial monitoring. The structure at J&J was strong; it had three committed, intelligent executives who all had invested in building the company. There was open communication between the three of them, they didn’t step on each other’s toes and they operated as a true team.

The final piece of J&J’s business plan included exit strategies for the owners. As discussed, there were three cousins who owned the company. They had plans to build the company, but realized that their children might not want to keep the business. For J&J, this exit strategy was the transition to retirement and “cashing out” of the business. While they could have gifted the business to the next generation, they were more likely to set up an ESOP (Employee Stock Ownership Plan) for their employees, or sell the company to an outside ownership group. They wanted to account for succession, so we devised a plan for both options. If they opted for an ESOP, the process would take a number of years to transition the family out of the business. If they opted to sell the company, they had included clauses in the ownership contracts that current ownership would be retained for five years (to ensure continuity at the company).

The bottom line is that creating business plans will help your company stay focused on its growth track. It helps to establish real goals, establishes a timeline for growth and provides a solid, living document by which management can steer the company. With proper planning and patience, you can utilize business plans as a roadmap to help chart a path for the company and build a brighter future.

About the authors: Mr. Gavin, CPA, CCIFP is a Partner at Grassi & Co., CPAs where he heads up the Construction Practice Group. Grassi & Co., CPAs is headquartered in Jericho and has additional offices in Manhattan, North Carolina, and worldwide through Moore Stephens International Limited. He can be reached by calling (516) 336-2440 or via email at rgavin@grassicpas. com. David S. Warshauer, CPA, CCIFP, Partner at Grassi & Co. contributed to this article. He can be reached at (516) 336-2407 or via email at dwarshauer@grassicpas. com.

This is part of the July 1, 2010 online edition of Construction News.

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