Executive opinion A fine balance
Getting the right balance between new work and RMI business is crucial for a stable cashfl ow, suggests ECA group chief executive offi cer STEVE BRATT
I
t’s a sobering statistic: on average, over the past three years, every day 10 construction contractors have gone out of business – not due to a lack of sales or because they’re not profi table, but because they ran out of cash. It’s a stark reminder that, for many electrical contractors, having a sustainable business model is not just about getting enough work – it’s also about the type of work we take on. I believe that too many building services contractors
have a business model that is inherently unstable from a cashfl ow point of view. For some businesses, there’s too much of a focus on winning new work, getting it done, getting paid and then fi nding the next job. That model makes them susceptible to the type of serious cashfl ow diffi culties that have affl icted so many in the construction sector. What we need to do is to look at the type of work and ask questions about matters such as the payment arrangements, whether it helps or adds risk to cashfl ow, and so on. Crucially, we need to look at how we can get more business from stable sources such as our existing profi table customers. The repair, maintenance and improvement (RMI)
market is an increasingly important area of business for our industry, and one that many contractors still don’t make the most of. Forecasts suggest that the RMI market will continue to grow, driven in part by the sustainability agenda and government initiatives to meet carbon reduction targets. RMI work often has a lot more stability in terms of cashfl ow, due to factors such as advance payments, reduced material costs, no retentions, and so on.
Market assessment A market assessment of the new work and RMI sectors confi rms the relative appeal of the latter. To sum up the new build marketplace, basically there’s not enough around; it’s a buyer’s market, it’s largely undiff erentiated, is easy to enter, and price is the dominating factor. The impact is uncertainty and shorter order books, which drives businesses to take more risks and to cut prices even further – leading to a downward spiral. It reduces fi rms’ ability to think about the long term, and traps businesses in a cycle of cashfl ow instability. Applying the same analysis to RMI reveals it as a
more positive proposition. RMI contracts are often based on existing relationships, which provide something of a barrier to entry, and potentially give contractors an inside track to new business with
It makes good business sense, then, to actively explore the opportunity for repeat business and discuss potential work with your client base
existing clients. Importantly, there’s a lot less risk passed down the supply chain – and poor payment practices are nowhere near as bad. As already identifi ed, in many RMI-type contracts, payment is in advance or phased, with no retentions. This brings stability to cashfl ow. RMI business is likely to be more stable too.
According to a recent Maintec survey, 80 per cent of engineering and maintenance managers said they expected their maintenance budget to remain the same or increase this year, despite capital expenditure eff ectively being on hold. This is likely to include work to reduce energy costs and outsourcing maintenance – areas in which ECA members have precisely the skills and expertise to provide solutions. Repeat business is also profi table. Harvard research
has found that every fi ve per cent increase in retention yields a 25 to 125 per cent increase in profi ts, and that repeat customers spend on average 67 per cent more than new ones. What’s more, repeat customers are likely to refer you to new clients, and pay full price – or even a premium – if you’re a trusted supplier. It makes good business sense, then, to actively
explore the opportunity for repeat business, and to discuss potential work with your clients – to become a solutions provider, building on existing relationships. As a starting point, I would suggest a few ‘dos’ and
‘don’ts’ for businesses. First, make sure you do: Know who your most valuable customers are – not just in the short term, but also in the long term;
Understand why they buy from you; Diff erentiate yourself with the things your customers value;
Know how to implement a retention strategy – and ensure you maintain suffi cient contact with clients;
About the author
Steve Bratt was appointed group chief executive offi cer of the ECA in October 2010. He joined the ECA as chief operating offi cer in 2007, and became deputy CEO in February 2010.
Know how to incentivise customer loyalty; and Ask loyal customers for referrals. And make sure you don’t become: One of those ‘cynical men’ who ‘know the price of everything but the value of nothing’ – able to fi nd the best price from a supplier but then practically giving it away to a client; or
One of the ‘always someones’ of our industry, who come in at a silly price, crossing the line where unacceptable risks are taken and margins are gone. If you can fi nd work with more stable terms and
conditions or increase repeat business opportunities, you will have a greater chance of improving your cashfl ow situation. And remember the old saying: ‘Happiness is a positive cashfl ow’.
November 2012 ECA Today 19
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