It may be stating the obvious, but silviculture owners should run companies that make a profit. Whether firms are actually doing that is not so obvious. At least that’s what I have to conclude after hearing contractors describe their various business models at the last WSCA Pricing and Market Summit.
It is apparent that most contractors are making money. At least many are making money flow through their companies. And at the end of the day, or the field season, there is some left over for them when things go well.
Nevertheless true profit should not be confused perceived profit – money that owners might pay themselves or glean from cash flow. True profits are the earnings remaining after all expenses are paid. And it is here that the ambiguity begins for many of the proprietorships that make up the contractor community.
Not properly defining profit is one of the contributing factors to why our sector undervalues itself. Our sector has to stop measuring success as being able to charge less for its services. Success should be measured by the far more challenging task of figuring out ways to charge appropriately for services. Budgeting true profit is part of that.
To understand profit means understanding why one is in business. That means subscribing to some financial principles and practices that should inform why anyone would become an entrepreneur. To explain them are numerous abstruse concepts around idealized competitive economies, social surplus, informational assymetries and the ways economic actors behave. But let’s keep it simple.
Owners, in theory, go into business because it presents an opportunity which involves a chance to make things better for themselves as opposed to staying where they are financially (i.e., not going into business, remaining an employee, and so on). Of course there may be other loftier motives too: like making the world a better place; or doing a better job. But the real impetus in a competitive economy is about getting more for your efforts. That involves making and maximizing profits.
In practice, owners should recognize they are two things: they are an investor and a manager. As a manager you should pay yourself the same you would pay someone else to do the job. You can’t be your own charity. It won’t work. Also consider how much skill it takes to be a competent manager. And consider how much those skills are sought by other well-paying sectors like mining, oil and gas, transportation and so on. So pay yourself accordingly. Don’t undervalue the work you do. Otherwise you are squandering one of the opportunities being in business offers.
As an investor you need to consider your effort, the cash you offer and the risks you undertake. Your time and commitment as an owner is part of your investment and there needs to be a return on it. The hard investment, like the cash you raise, needs to be compared to what it would make elsewhere. The four percent many firms report as their estimate of profit is the same or below what a tame conservative stock portfolio offers today. That gain is at minimal risk. Also note that some silviculture firms would have been better off trading their customer’s shares then contracting for them this year.
As for risk, under Canadian contract law the moment you submit a bid you attract a liability. And those just pile up as you enter an actual agreement, generate a payroll, use your line of credit, deal with CRA, satisfy the various regulators and so on. And that exposure to the undercurrent of legalities you attract says nothing about trying to manage your variable costs, the uncertainties of seasonal work, keeping your workers and clients happy, and delivering a product of near perfection on time to avoid penalties.
The last paragraph of risk just speaks to the things you can manage. Profits are also affected by the things you can’t manage. In that case, profits are a necessary hedge against one bad contract putting you out of business for reasons you can’t control.
In the long term profit is necessary to generate some future security. How sellable is a company that doesn’t show a profit? This assumes you actually have something you could sell. If not, then how will you pay your way when you no longer can chafe at the traces pulling your business through another season? Making and putting away profit is necessary for that inevitable day.
There is even a moral component to making profit. The ideal competitive economy consists of profit-maximizing firms and utility-maximizing consumers. The idea is that these transactions create surpluses, which are used by generous investors to fuel the economy. If there were no surpluses then the economy stagnates as investment falls off. So in the big picture owners need to do their part so that the larger economy keeps chugging along. Otherwise they are just wearing out their work clothes as things cycle downwards.