Ontogeny and phylogeny
Nov 1, 1997 12:00 PM, Ted Uzzle
Recently, I heard a systems contractor ask, "How do small contracting companies survive?" It was so stunning a question that it set me thinking.
The minimum size of a contracting company is three people: president-salesperson-chief installer; office help to keep the books and answer the telephones during business hours; installation helper. The installation helper is necessary because one installer cannot lift today's medium-sized loudspeakers, nor an amplifier cabinet. These might be one family: two spouses and one offspring. Let's assume they're hungry and expect to stay that way. We'll put down the owner for $50,000 in cost to the company (salary, benefits, payroll taxes), the office help for $40,000, the helper for $30,000.
The business premises will cost, and that will vary a lot, but if they're paying less than $25,000 a year, then they're probably in a tent in the back yard. It'll cost $12,000 to pay for the van and keep it running a year. Let's put down $25,000 a year for utilities and miscellaneous. They're self-insured, meaning one strike and they're out.
Let's do the math. In order to earn the $180,000 they need to keep the doors open they need to buy and re-sell another $180,000 in installation equipment. That's a gross annual revenue of about $360,000. They're making no profit and paying no company income tax. Do you hear the sound of a trunk slamming?
They have to do a tiny $7,000 installation every week. You don't need a graduate degree in business administration to see Mom-and-Pop Contracting won't make it. Three people can't sell and install 52 systems a year.
Now, add a full-time salesperson and another installer, making real, livable wages. Mom, Pop, and Junior now want real wages, too, and they want to see some profit at the end of the year. The contracting company's gross must about double, to $750,000, to cover these expenses. Even so, Mom-and-Pop-and-Associates Contracting is very vulnerable. It will take only one or two slow-pay jobs carried as receivables to get the contractor on credit hold with manufacturers. Having to eat even one single job will put them under.
So how come there are $750,000/year contracting companies all over the place? How do they survive?
They don't survive. Not like that, they don't. They either grow large enough to stay in business, or they go under, owing money everywhere. Yet the category of $750,000/year contractors endures. For each one that makes it upward or goes bust there's another optimistic entrepreneur ready to start up, another trunk ready to be slammed.
Ontogeny is the life cycle of the individual; phylogeny is the life cycle of the species. There will always be $750,000/year contractors, although no individual contractor will long remain a $750,000/year company. How long is always? So long as the total market grows faster than existing companies grow. So long as contracting companies go out of business. So long as contracting employees think they can do better on their own. So long as the threshold for getting into the business is low. So long as the spirit of entrepreneurship remains strong.
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