Since the start of 2009, it has been impossible to escape negative news about the economy. Unemployment claims have risen thanks to massive job cuts, holiday retail sales were worse than expected, home foreclosures nearly doubled last year, and large corporations file for bankruptcy at the same time that small businesses across the country quietly close their doors.
And as optimistic as building service contractors usually are, they are finding that, in these uncharted economic waters, it’s hard to predict what’s around the corner. Customers are spending less on cleaning and are delaying payments, causing cash flow problems that affect payroll, vendor payments and lender relationships.
“I have been a BSC for over 34 years and this is the worst economic climate we have experienced,” says Marc Lisenby, president of Master Building Services in Tucker, Ga.
Cleaning services are still a necessity compared to luxuries, as indicated by huge downturns in industries such as tourism, construction and retail, which are far worse off. Still, there has been no shortage of knocking on wood for BSCs, who are not as “recession-proof” as they once thought.
“[Cleaning is] definitely not recession-proof, but I think it is more recession-resistant than a lot of businesses out there,” says Steve Hendrickson, CEO of Porter Industries in Loveland, Colo.
All BSCs are concerned about the economy as a whole as well as the specific market sectors they serve. While it’s a certainty that a small percentage will not survive the year, many contractors have found stability by paying attention to customers and receivables, as well as opportunity despite the hardship.
The Trickle-Up Effect
Whether they are falling behind on payments or seeking to reduce their bills, the depressed financial situations of customers are bound to affect BSCs.
“Even our government customers have seen reductions in their revenue which caused them to re-bid some contracts in search of lower prices,” Lisenby says. “Some of our customers are paying slower due to their own collection issues and most are putting off any additional services — carpet cleaning, window washing, tile floor stripping/refinishing — until their situation improves.”
Having a diverse customer base can make a big difference in a market like this, says Taylor Bruce, president of IH Services in Greenville, S.C.
“If you’re a small business and, say, 50 percent of your business is with one customer, it can be a very difficult thing if that customer wants to cut back,” Bruce says.
Most customers are interested in a cost savings right now, and a few of them needed it yesterday. BSCs whose customers are falling behind in payments know how important it is to stay on top of receivables. Keeping a healthy cash flow is key to staying afloat when times are tight. But that is getting more difficult for many BSCs.
“When it takes an extra 15, 30 days to collect the money from our customers, that stretches out how long we take to pay our vendors,” says Bob Eberhardy, controller at K-tech Kleening Systems in Weston, Wis. “We try to pay them within that 30 but unfortunately we’re up to about 45 with many of our vendors, simply because we have to match the cash in with the cash out.”
No one knows the pain of missing cash better than BSCs who have had customers declare bankruptcy — another symptom of this economy that is likely to persist in 2009. Chris Waldheim, president of J’s Maintenance in Glendale, Calif., took a loss of about $15,000 last year when two customers closed up shop — and he’s worried about a few others, so he’s decided to take a more proactive step before taking on new customers.
“In terms of what we’ve changed because of the credit crunch, we are starting to do credit checks as we enter into new contracts, which we haven’t done in the past,” Waldheim says.
Another option is to change billing terms to due dates at the beginning of the month rather than the end.
If all else fails when it comes to collections, Lisa Bands, president of My Cleaning Service in Baltimore, won’t hesitate to show customers that she means business. Last summer, she had a customer go past 90 days — a first for the company — and after many calls went unreturned, she showed up in person to demand action.
“So I just went down there and I stood there and I went, ‘You have to do something, because that makes a difference whether I can pay people or not,’ and they ended up overnighting a payment because they knew I was not leaving their office until they did something,” she says.
For those BSCs who practice good communication with customers, a tough economic time can actually pose an opportunity to strengthen existing partnerships.
“I think BSCs should be on the forefront of this by meeting with their clients to say, ‘What can we do to help?’” says Paul Senecal, president of United Services of America, Stamford, Conn. “The clients will appreciate it. Generally, when the contractor suggests reductions, the customer accepts them and it will solidify your relationship.”
So, even though customers have less to spend, they are more open to taking advice from BSCs than they may otherwise be. That is an opportunity for a contractor to listen to what their customers really need and be in a position to problem-solve for them. As contracts renew, look for customers to be restructuring cleaning programs in pursuit of a cost reduction. Common requests include reductions from five times a week to three, or three times a week to one.
Increased communication isn’t always a good thing, however, says Bruce. The decision-makers in customer organizations are under pressure to reduce costs, and they look to BSCs to help but sometimes it’s not possible to give them what they want for the price they need.
“The worst thing you want is to not be able to help them, then they look to somebody else to help them. Somebody else can always come along and say, ‘I can give you a lower price.’ It’s just, what are you going to get for it?” he says.
The reality is, contractors will lose customers who are shopping for services based simply on price. And even though it hurts, it is in a BSC’s best interests to go separate ways with customers who do not contribute to profit.
“What’s happening now is the big race to zero,” Hendrickson says. “And there’s some point at which I think all of us that are committed to our industry really need to know when to walk away — if you give away too much nobody wins.”
Customers, more now than ever, need to be educated that initial price is not equal to total cost, he says.
Many BSCs have been trimming back internally for months in reaction to or anticipation of the recession. Restraints on major purchases, hiring, raises and workers’ comp expenses have become a focal point of operations.
“Those that do have a solid business plan have recognized this coming for a year to 18 months now and have begun to make changes already, and will have things in place for the next 18 months and will survive it,” Eberhardy says. “Those who don’t have those safeguards and benchmarks already in place are going to be the ones that are going to struggle for the next year or two.”
A good relationship and longstanding record with a bank could mean the difference between keeping a line of credit and having it reduced or taken away. While small businesses across the country have experienced shrinking lines of credit, BSCs that haven’t taken on a lot of debt and don’t borrow frequently against their lines have been spared having that rug swept out from under them.
“We’ve had the same banking relationship for 41 years and that is extremely valuable right now. We have a fairly large credit line which we rarely have to use but you still don’t want to give up any of it because you just never know when a big opportunity is going to come your way where you need that cash,” Hendrickson says. “We didn’t have a great year and I think without a long-term relationship with a bank that knows our company — knows the kind of people we are, knows we’ve paid our bills for 40 years — it could have been a different story.”
With banking institutions being hit so hard in this recession, many BSCs aren’t sure whether their banks will even make it. For United Services, the fear that its large national bank would be bought up and forced to reduce lines of credit spurred the company to seek services from a smaller local bank.
“We changed to a smaller local bank that’s more agile and didn’t have any sub-prime exposure,” Senecal says. “And, actually, we got a bigger line of credit.”
Is Growth Possible?
Some BSCs have abandoned the search for new customers to focus on keeping the customers they have, but others see the market unease as an opportunity for sales and creativity.
“I think it’s a good time to push sales, truthfully,” Waldheim says. “I think it’s a good time to get out there and talk to people and try to land accounts. As some companies are trimming back and firing people, I think it’s a good time to be out in the market, be visible.”
Customers who are re-bidding are clearly nervous, Bruce says, which in turn makes contractors nervous because some customers inevitably are lost to lowballers.
“But at the same time, if it happens to us, it’s happening to a lot of other people, too, so we have the opportunity to pick up business,” Bruce says.
Bands says 2008 was actually her best year ever, and feels running a tight financial ship and staying committed to customer service will provide the strength to grow this year as well.
“We might have to be more creative in the jobs we get for specialty services — instead of getting as much post-construction (cleanup), we might have to go after more carpet cleaning or other services,” Bands says.
Ultimately, a number of factors will separate those BSCs who swim from those who are sunk by the recession: a strong business plan, a diverse customer base, partnerships with customers, ambitious sales, controlled operations, spending restraints, downsizing when necessary, little or no debt, and credit availability. Above all, survival will be easiest for those who have planned for the best and prepared for the worst.