We all start our businesses with the idea of growing them, right? But when do we strive for revenue growth? When do we focus on maintaining revenue and increasing profitability?
In the early stages of operating a business, you must identify your core strengths and be hyper-focused on one or two key markets to generate revenue growth and build the foundation of your business.
In the middle stages of operating a business, when you have a foundation to operate from, you can look at opportunities to enter new markets by expanding your capabilities and offerings.
And in the late stages of operating a business, you are most likely preparing for your exit strategy – i.e., selling the business, transitioning ownership to partners or family, liquidating the assets or maintaining ownership and structuring management to run the business without you. Keep in mind, these stages of a business are not identified by time, these stages are identified by your goals, your revenue, and your assets.
A spray foam insulation business is essentially a production company, where you use your resources, think equipment and employees, to create an insulation product for your customers. And one of the key management metrics all production companies should use to optimize their business is equipment utilization rate.
What does equipment utilization rate mean in the spray foam industry? Essentially it is the percentage of total production capacity that you are using on average. For example, if you have one spray foam rig and one crew, what is your absolute maximum production capacity? Could they operate 7 days a week? Probably not, but 5 days a week is realistic for most crews for 50 weeks a year. So, a company with one rig and one crew has a maximum operational capacity of 250 spraying days per year, if the company can get all maintenance of the equipment done on non-spraying days throughout the calendar year, if they need weekdays for maintenance time, then it may reduce their maximum operational capacity, it depends on the capabilities and resources of the company.
I typically suggest companies estimate their maximum operational capacity at around 220 spraying days per year, per rig to begin and they can always adjust these internal numbers as they see fit.
With this in mind, let’s dig in a little deeper into the stages of operating a business.
Early Stages of Operation
In the early stages of your business, you need revenue to sustain and justify continuing to run your business. You start with an equipment utilization rate of ZERO, because you have no jobs and no revenue, and your goal should be to acquire customers as quickly as possible to fill out your production schedule and increase your equipment utilization rate. You need to increase your asset usage by booking work for your equipment and crew.
In this stage of operation, your focus should be to grow revenue. What are your core strengths? What are your companies’ capabilities? What types of projects are you best at executing? Identify your value and be hyperfocused on how you serve the market to grow your revenue.
When your equipment utilization rate starts approaching 70%, this is an opportunity to shift your focus more toward increasing profitability as you continue to grow revenue. Review your project history for profitability in dollars and margin to identify the types of projects where you make the most money and fill your production pipeline with those types of projects to increase profitability.
Middle Stages of Operation
The middle stages of operation occur when your equipment utilization rate is consistently above 70% and you are considering adding equipment or entering new markets. There are typically a few lines of thinking when it comes to buying equipment to add assets to your business.
One thought is that you don’t want to run into scheduling issues so you would rather add equipment when you get around the 80 to 90% utilization rate. This significantly lowers the possibility that you run into service issues, but when you add like-kind equipment to your assets, your equipment utilization rate drops drastically. If you were to add a second rig when your first rig is at a 90% utilization rate, your approximate aggregate utilization rate would be 45%, and you should once again shift into an early-stage mindset of growing revenue to increase your equipment utilization rate.
Another approach is to increase revenue first, sell more jobs, oversell your total utilization capacity, and subcontract some of the work to other SPF contractors in your working area until you have enough work and relationships to add the new equipment. You may run into some service issues with this method, and you will have to rely on your relationships in your local market to get some of this work complete.
Of course, you may need to add assets when you want to expand into a new market, such as adding concrete lifting or injection foam to your business. Adding new equipment, with a new purpose introduces a new equipment utilization rate for that piece of equipment and does not change your existing equipment utilization rate.
Late Stages of Operation
The late stages of operation are when you know that you want to move on from the business soon, like in the next 2 to 5 years. Depending on how you plan to exit the business, you may focus on profitability, revenue growth or liquidating equipment, it all depends on your specific situation.
Expanding your business is not simple and there is no magic bullet. You can attract more customers, enter new markets, improve sales closing rates, increase profitability, or increase repeat business, to name a few tactics. The methods you decide to use should be dependent on the status of your business at that time and to make matters more difficult these conditions will change over the lifetime of your business.