If you’ve been in this business long enough, then you know the story all too well. A shop opens up in a shiny new facility with brand new equipment. The owner and other shop executives are knowledgeable about the industry. It seems like the shop has everything it needs to be successful.
For some reason, though, it isn’t. There are rounds of layoffs and rumors about the shop needing work. After a few years, the shop closes down and sells that once-shiny building and all the equipment inside.
Job shop failures are common and they were especially frequent during the years from 2008 to 2010. Even today, though, it can be quite a challenge for some shops to stay in business.
You’ve probably seen that story play out before. Maybe you’re even experiencing it firsthand. There are a few common reasons why shops don’t make it. The good news is that if you can recognize the source of the problem, you can take action.
Your shop doesn’t have to go under. There’s still time to turn it around. If any of the following sound familiar to you, take a step back and do some self-analysis. It may be time for you to make some big changes.
Here are three of the most common reasons why job shops fail:
The shop is leveraged on equipment, buildings, and machines.
It’s easy to get caught in the trap of buying too many machines and other pieces of equipment. After all, the only way to make money is to complete jobs. And the only way to complete jobs is with equipment.
However, your machinery and equipment dealers have a vested interest in selling you more machines. They may tell you that need more equipment than you actually do. Or they may tell you that a certain machine is only capable of one type of job when, in fact, it can handle lots of different jobs.
Or you may just really like new, shiny equipment. Whatever the source of the issue, it’s critical that you don’t take on more equipment than you can handle.
Each piece of machinery usually comes with financing and regular monthly payments. Those payments may not seem like a big deal when business is booming, but they can bring your whole business down when cash is tight. Remember….you can lay off employees. You can’t lay off the bank.
The best way to avoid this problem is to know your process inside and out. Know what your machines are capable of and what they cannot do. Know your maximum capacity and don’t buy new equipment until your current capacity is absolutely maxed out.
Also, don’t take the dealer’s word for it. They may have good intentions when they recommend that you buy a certain machine. However, they’re not the ones who have to make the payments. You are.
A solid ERP system can help you get a grip on your process, your capacity, and what machines you actually need in your shop. You can then make purchasing decisions based on hard data, instead of based on your gut feel or a dealer’s recommendation.
Customers use the shop as a bank.
You do a job. You deliver it, along with the invoice. And then the waiting game starts. Ten days go by without payment. Then 20. Then 30. All the while, you’re sending money out the door to pay salaries, financing costs, and other bills.
When your customer takes their sweet time to pay, they are essentially using you as a bank. You are their line of credit so they can pay bills that are of greater priority to them. And if you’ve already delivered the products, you don’t really have any recourse but to wait until they decide to pay.
Cash flow challenges can be fatal for nearly any business. All it takes is for one job to fall through, an unexpected expense at the shop, and a few late invoices for you to be in a serious cash crunch. If that crunch gets too tight, your shop could fail.
This is easy. Just tighten up your payment terms. Make it payable on delivery, or net 10. Better yet, ask for a 25 or 50 percent down payment upfront. That way both you and your client have a vested interest in getting the job completed as soon as possible.
Some shop owners are afraid to do this because they think they’ll offend the customer. You won’t. Asking for money upfront is common in nearly every industry. After all, your customer is running a business just like you. They understand the importance of cash flow. Tighten up your receivables and you’ll eliminate a great deal of failure risk.
The shop doesn’t know how to acquire new customers.
If you’re like a lot of shop owners, marketing isn’t your strong suit. Maybe you came from a manufacturing background, so you didn’t have a lot of face-to-face experience with customers and prospects. Once you put on your shop owner hat, though, marketing is a big part of your responsibilities.
New customers are the lifeblood of any shop. It’s inevitable that you will lose customers on a regular basis. Some customers go out of business. Others move on to new vendors. Still others may develop new products and may no longer need your assistance.
It’s important that you have new customers in the pipeline to replace those customers that you lose. The shops that fail often lose major customers and have no new work to replace them. A cash crunch soon follows, leaving the shop on the verge of failure.
Develop a formal job shop marketing process. You wouldn’t dare produce a product or start a job on your shop floor without a defined process in place. The same should be true of your marketing efforts.
Your website is a great place to start. Today, you can work with nearly anyone anywhere on the planet. Your website can be a great tool for attracting global customers and winning their business. You should have fresh, regular content on your website’s blog along with a newsletter or some other form of consistent email contact. If that’s not your strength, consider hiring an outside consultant to help you with your marketing process.
Debt. Cash flow. Marketing. These are three of the biggest contributors to your shop’s bottom line. They can play a huge role in whether your shop is a success or a failure. The good news is that it’s never too late to turn your shop’s fortunes around. If you’re struggling with cash flow, financing costs, or customer acquisition, now is the time to take action.
For more information on how an ERP system can help you manage your operations and your cash flow, contact us today. We’d be happy to discuss our E2 shop software with you and show you how it can keep your shop running successfully.