The Importance of a Bumper

bump·er

¹    [buhm-per]               

An automobile's bumper is the front-most or rear-most part, ostensibly designed to allow the car to sustain an impact without damage to the vehicle's safety systems. They are not capable of reducing injury to vehicle occupants in high-speed impacts, but are increasingly being designed to mitigate injury to pedestrians struck by cars.  (Wikipedia.org) 

I thought a literal description for a bumper was a perfect metaphor for how one works in a business.  On the BMW you see in the picture above, the red bumper is designed to protect the operator and passengers of the vehicle from harm, in the event they run into something.  It also protects the vital parts of the engine, and frame, for low speed impact.  If the vehicle taps another vehicle, in a parking lot for example, there may only be a minor scratch to the bumper and no damage to the vital parts of the vehicle, therefore minimizing damage and cost for the repair.

In a business, a "bumper" has the same function, except it is for financial accidents, not physical ones.  In my business it could be financial accident related to a physical one, since I am a building contractor.  


What is a bumper for your business?  It is cash, saved in an account you don't touch.  Accountants and the IRS call this retained earnings.  This is what you can do with your profits if you don't spend them.  This cash savings protects businesses against all kinds of accidents, and it facilitates good decision-making practices for the owners and executives.  It is like a reserve energy tank that supplements the life of your business and makes it stronger every day, and it gives companies the freedom to experiment with new products, services, and marketing strategies.  


Accidents Happen


It was the Spring of 2010, and we were very busy opening pools, repairing pumps and filters, and building new pools.  I needed a truck for the new mechanic I hired, so I found one on Ebay and drove to New Jersey from Virginia to pick it up.  I paid $2,500 cash (major bargain at 90,000mi) for the little Dodge van and towed it home on a trailer. I test drove it around the block for 5 minutes.  For those of you who see what's coming, I now know better than to buy a truck that I haven't thoroughly checked out, but this isn't a blog about buying used vehicles. We put it into the fleet immediately with my new mechanic at the helm.  


I got the call at 10AM the same morning we put tags on it from Jake, my mechanic.  He said, "Joe, I hate to tell you this, bud, but there is something very wrong with this van.  I can't get out of 2nd gear and I am on 495 (major messed up beltway around DC).  "GREAT!!", I thought.  I felt like such an idiot.  I made a big deal with everyone about finding a great bargain, then I spent an entire day picking the lemon of a van up from NJ. Jake managed to get it to a local mechanic, and he diagnosed the van as needing a new transmission.  Well, this is a surprise.  Suddenly my $2,500 bargain, turned into a $4,200 lemon.  The transmission was $1,700.  


At the time, I had the money to pay for the transmission, but just enough.  I had to use some of the money I set aside for payroll that week to pay for the van's transmission.  I thought I could somehow make enough money by Friday to cover payroll.  And if I couldn't, I would definitely be able to cover payroll by Saturday or Monday.  The guys would just have to wait a couple of days to get paid.  They were use to this scenario, and they understood what I was going through.  

Side note:  My core employees are incredible people.  They have stuck with me through the worst economy since the Great Depression.  They have worked hard and never complained.  There were times when they waited for me to pay them, for weeks and months.  They never missed work or showed the least bit of contempt for me for not being paid the money I owed them.  I would do anything for these guys.  They are family to me.   

Today, they are paid-in-full, and they are all working for more money than they have ever made in their life.  If you are reading this, boys, I love you all.  Thank you for your service and friendship.  

I was operating without a bumper.  My company was broke and we were living from pay period to pay period. We have always been busy, though.  In fact, our gross revenue grew by 15-25% per year for 4 years, until the recession in 2009. I just never saved any money for my bumper (retained earnings). Would you drive a car without a bumper?  I certainly wouldn't be legal if you did. When a little $1,700 transmission needed replacement on a newly purchased van, it was a disaster to my company.  For those of you who have never had the experience of not being able to make payroll, believe me, it is a disaster.  People work hard all week, and they expect to get paid.  Most of them live paycheck to paycheck, and when they don't get their's, they go hungry.  Just like if you drove a car without a bumper, and you hit some one at slow speed, it would do major damage to the vehicle, and possibly your self.  


Another time that was nearly catastrophic, was when I was hit with a building code violation.  I built a swimming pool without getting the proper plans created for the county.  In the end, I had to pay $20,000 cash, all at once, to the homeowner, in order for the county to dismiss the case.  Luckily I managed to pay this money on time. Otherwise I was looking at a criminal charge, possibly loosing my contractor's license, and ultimately going out of business.  After paying the $20,000, I was left broke again, unable to pay vendors for products and services we needed to complete jobs.  Consequently, we had upset customers, and incomplete jobs, and we were unable to collect more money because we could not meet certain milestones.  It was a compounded problem.  


This whole situation could have been avoided.  In the first place, had I obtained the proper plans for the county, this case wouldn't be an example.  Secondly, if we had a bumper, I could have paid the $20,000 without effecting the operating cash for the business, and then built up our savings again, over time. 


Good Decision-Making   


A good friend of mine, Bill (not his real name) once said to me, "Owners make bad decisions when they operate without cash in the bank."  What this meant to me was that when a company has little or no money in the bank, the owners don't do the best things possible for the company, rather they do what they have to do.  They have limited choices.  Bill's wife, Gina, owns a business, and she started the business with a solid business plan.  Gina's plan had her company at a break-even point, two years after she started.  During that first two years, the business income fluctuated, and she rarely made enough money to pay all of the expenses every month.  So, Gina and Bill had to inject money out of their personal savings to keep the business on track. About 18 months after Gina's business started, Bill told me he was putting another $50K into his wife's company.  This is when he told me that companies make bad decisions when they don't have money.  


Gina had an aggressive advertising and marketing plan.  She was consistent with her approach and she modified and adapted her marketing as time went on.  She did all the right things with a new business.  Gina watched the numbers closely, she listened to her client base, and she kept thinking of new ways to promote her business.  If she did not have money in the bank, she would not have been able to pay for the marketing and advertising.  Not to mention, paying of the upkeep on her high-end facility.  The appearance and condition of her place of business was essential to her success.  


After two years, she met her goal, and the business paid for all of it's own expenses, as well as turning a modest profit.  After the third year, she has solidified her position in her market, reimbursed her and her husband's savings, and she is looking to expand her business by opening another facility.  




 Freedom to Risk


There is a business principle called diminishing returns.  

diminishing returns

 

noun

1.

any rate of profit, production, benefits, etc., that beyond acertain point fails to increase proportionately with added investment, effort, or skill.

2.

Also called law of diminishing returns. Economics . the fact, often stated as a law or principle, that when any factorof production, as labor, is increased while other factors, ascapital and land, are held constant in amount, the output per unit of the variable factor will eventually diminish.  (Dictionary.com)

This is a reality of doing business.  As businesses grow they receive less reward for their effort, and it becomes increasingly difficult to maintain a profitable business.  In order to continue growing and ever renewing your company, it is necessary to invest money in advertising, marketing, and training.  In Stephen Covey's book, The Seven Habits of Highly Effective People, he illustrates 

how in quadrant 2, you build capabilities, maximize opportunities, and manage risk.  In quadrant 1 you see things that need immediate attention.  In his book, he talks about how we spend our time and in what quadrant.  I am equating time, energy and money to the quadrants, which others of done as well.  


If we spend all our time and money dealing with crises, payroll, buying materials for jobs, paying fines and fees, we may feel like the hamster in the wheel, never getting anywhere.  If we dedicate some of our resources to quadrant 2, we develop new business, learn new skills, and develop new services to offer.  Here we spend money on marketing, and experimenting on new ideas.  Some work and some do not, but we don't find the ones that do until we try.  


When a business has a healthy amount of savings, it can afford to take calculated risk in order to grow.  You never want to risk the money you have for payroll, or operating expenses on a new idea that may or may not work.  If it does not work, your employees won't eat this weekend.  


Companies with a bumper have the freedom to do things to make them more completive in their market.  They can train their employees, thereby making them more knowledgable and desirable to the customers.  Companies can try new marketing strategies, and new advertising.  They can invest in assets that make them more valuable and possibly produce new lines of income.   


Recently, I have taken on some new projects to promote my business.  I try to find projects that are relatively inexpensive, in order to minimize my risk.  One of the projects was a marketing/educational video for homeowners that want to learn more about building a pool at their house.  In our video, we show the process of building a pool from start to finish.  It is very professional, high quality production.  My thought was that it would be an introduction to potential clients, and it set their expectations for the process of building a new pool in their backyard.  It also is an online marketing tool.  People can find us by Googling "pool construction video virginia".  Our video is always in the top 10 results.  


My investment was around $2,000.  If I did not have a bumper, I could not have afforded to produce such a beautiful video.  I was able to be creative and think of new ways to expand my brand, expand my online exposure, and ultimately increase my market share.  Since the video was released 6 week ago, I have sold one new pool, and gone on over 10 leads.  Would I have had the sale and leads without the video?  Maybe, but I see that the video has added credibility by allowing customers to see me and my company in action.  While I cannot contribute the leads and sale 100% to the video, I believe it has helped tremendously.  


With a bumper I have the freedom to create and experiment with new ideas.  Consequently, I have the ability to continue to be relevant and prosper in my market.  For years I survived without a bumper, but it is a lot more fun with one, and we are much more successful with one.