BENCHWARMERS

Why sitting out the hurricane season on the bench could be good for your company.

 My wife says that we are deeply disturbed people watching the television so intently, reading E-mail alerts from NOAA sent to our Blackberries, pulling Hurricane forecasting off every statistical web site we can find, just waiting for the “manna from heaven”……..waiting for the wind to blow and blow hard.

 All national companies plan in detail for the blessed events staging trucks, trailers and people just over the line inGeorgia, holding their breath for land fall of a Category 1, 2 or 3 Hurricane. Anything stronger than that, there isn’t much to dry or restore. Re-construction becomes the answer. The more aggressive companies bring their whole entourage into the fray putting assets and people in harm’s way. Everyone wants there shot at the wet revenue. It’s interesting to watch when the first storm approachesFloridaas dozens of “storm troopers” line up convoys of trucks, some rented and some owned, full of every piece of drying equipment they can get their hands on. The longer it has been since the last “event”, the longer the line of vultures waiting to feed on the carcasses of injured buildings.

 The real question is why? Hurricane work really isn’t that profitable to start with. Unless your company has a contractual obligation to serve, or has offices in the city of state, perhaps being a benchwarmer could be the best decision. Why? Even the largest of companies get handed their hat  seemingly year after year, sometimes for millions of dollars. And unless your company has money trees on its balance sheet, you may not be able to wait a year or more for your money.

 The business opportunities abound, but so do to the profitability challenges, business risks, carrying costs, opportunity costs and the business model “after shocks.” With business down across the board this year, many of you won’t resist the temptation. The desire to try and make up two years of revenue short falls with this year’s hurricane events will cloud your business judgement. And remember what Gordon said;”never get emotional about stock. It clouds your judgement”. So, let this serve as a re-fresher.

 I’ve already mentioned low profitability but to be more precise, companies can expect to see profit margins less than half of the norm in their business model. It’s not unusual for the national players to spend close to a hundred thousand dollars or more to move equipment, trailers, generators, supplies and people to an area devastated by a hurricane, even a small one. And that’s before the company even has its first signed contract for work.

 That “sunk cost” is hard to re-capture. The players that have been here before know that the indirect job costs have to be allocated to the jobs you take, but that hardly ever covers the actual costs. Customers as well as adjusters think you are gouging them for an extra 5% when all your company is really trying to do is break even on the indirect expenses. Sorry though, most just won’t pay the line item.

 Secondly, credit decisions , or poor risk decisions, can effect cash flow in your company for years to come when your decision, or worse that of a salesman, is made in haste. Most companies don’t pull credit reports on their potential customer, don’t execute contracts correctly if at all, don’t pursue lien rights correctly, leaving themselves open for one of three out comes; either not getting paid at all, getting paid in a year or more, or if you are lucky, being able to negotiate and get out as quickly as possible. Anything other than close to full contract price really isn’t worth the financial risk.

 Risk management decisions are clearly one of the largest stumbling blocks to successful hurricane opportunities. Companies considering taking on the prospective work must look past the revenue.

 There are three primary concerns; profitability, risk management in the form carrying costs and opportunity costs, and the after affects to your company. Managing each of these during the normal course of doing business is easy, relatively speaking. But the chaos that is a hurricane event is exponentially more complex than normal business. One would think that with so many contracts falling into the cost plus category that making money is guaranteed. But it’s not.

 Capturing data for invoicing seems to be the single largest business problem for any player, no matter what level. If you can’t invoice for what you actually perform, you of course still have the costs associated with performing the work and your company may lose money on the effort .

If your company has trouble capturing data, you are going to have problems with the receivable. And your company’s probability of collecting that receivable becomes smaller every week that rolls by after your company has returned home. Like any other business, the disaster recovery business is all about cash flow with profit being second. If your cash flow from operations is decreasing as a result of working hurricane activities, you should really consider whether the decision to participate is driven by emotion (all my competitors are there so I have to be), or whether your decision has been weighed by a good business decision model. If you don’t know what cash flow from operations is, you really don’t need to put your company at risk in a business environment that is so very risky.

 Working the opportunities in a hurricane event without substantial cash reserves can be financial suicide. Carrying the profit portion of the receivable is one thing but carrying the obligations to vendors and subcontractors is another. Trade terms of 30-60 days aren’t going to be enough compared to the length of time it will take to collect your receivable. So you need a plan before entering into every opportunity that firmly defines how your company will meet the financial obligations attached to the potential uncollected revenue other than “the hope” that your customer pays.

 If your customer doesn’t pay, can your company get a loan? The largest issue for your banker will be probability of collection. Once collectibility is established, your company may be pledging assets to fund your cash flow. Diminished profit coupled with carrying costs suggests that what was half of your normal profit may be down to a third or worse.  

 Your company should have a financial target and job profile that you really want based on the assets you are bringing before you even approach hurricane opportunities. I’ve seen companies accept jobs trying to cover the “sunk costs” of getting to the event only to tie up human and capital assets which prevents them from taking the next job. Quite often, the next job was the right one. Taking a job to have a job only means that there is opportunity costs associated with your decision. You don’t want to be obligated to a marginally profitable job with questionable collectibility when a good job comes along.  

Part of the consideration in choosing that job isn’t just the financial target or the job profile, but the customer alone. There is no mistaking that some categories of customers put your company more “at risk” than others. Sadly, the sales force doesn’t usually ask the right questions. And when they don’t, that’s the ball game. There are condos, air port hotels, malls, strip centers, high rise offices, office condos, leased space and the questions that go with them such as “who has the right to cure?”. How much is the hurricane deductible, the co-insurance, what are the structure limits, the content limits, what is the demo cap, is there mold coverage?Are you applying for FEMA money? You know the drill. But companies always forget.

 It will be weeks, not days, before someone sees a certified copy of the insurance policy. And that “mold remediation” you just performed isn’t covered. And yes, it does matter. “My contract is with the insured” is a naïve and arrogant statement that will come back to you when that receivable turns south.

 The last risk item that we should discuss is the personnel issue. I don’t know a company that doesn’t use recruited labor during hurricane season, even for project management. And every year, there is the temptation after returning home, to maintain the same level of human and capital assets as during the disaster recovery. This is still another dimension of the cash flow problem. Resist the temptation.

 Hurricanes are a statistical probability but how your company reacts to these random events should be anything but. Don’t get caught reacting to sudden changes or events as if those changes are permanent. Shed the excesses as quickly as possible to protect cash flow.

 As a project manager, I have worked for two of the largest players in the market place. As a consultant, I’m still cleaning up job files from both Katrina and Wilma, now three years on. Many of those unsettled insurance claims have unpaid drying and restoration invoices attached to them and the majority will likely be in court, or at the very least, in appraisal. If readers could see those files, you would see the names of your competitors and in some cases, maybe even your own name. And every one of these competitors thought it wouldn’t happen to them.

The majority of the time the reasons are the same. Greed, poor decisions, and poor execution get even the largest players in trouble each and every year.

By the time this article is published, “Hurricane Season” will have actually started and each of you will have already started thinking about the money your company might make. I would suggest to you that maybe; just maybe, some companies should sit this one out. Being a benchwarmer might just be the best financial decision you’ll ever make.

Tis the season”. See ya’ll at theFlorida line.