A client writes: “We have shrunk back to $3,000,000 from $6,700,000 and have remained profitable every year and plan to do it again this year.”

Congratulations to this company. This recession shows that it’s a lot easier to stay profitable while volume expands than it is when volume contracts.

Why is downsizing so difficult? There are several reasons. As the company grows, we invest in employees, many of them “keepers.” We plan to build our future on them because we know that their contribution will grow with the company’s progress. When we’re forced to decrease overhead, it’s difficult to let those keepers go. But most companies today do not have self-financing to support losses over multiple years.

A second reason why scaling down is hard to do is organizational. In a $7 million company, we hire specialists. Often those specialists can’t multitask the way a company of smaller size demands. So even if we cut our team numbers, we may not have the right players left to succeed in changed roles.

Smaller Volume, Smaller Jobs

In this recession, downsizing means that not only is volume reduced but so is average job size. That means it takes more work to sell each bit of volume, and if processes aren’t streamlined for the new reality, you may be overwhelmed with work, appear to need everyone you have, and find yourself at break-even or worse.

Downsizing may also represent the (temporary) death of a dream for the company owner. That larger volume may have left him free to step away from the company to accomplish other goals, or at least to step back from a day-to-day role, or maybe to concentrate on sales and leave production to a production manager. The slap of the recession and the need to cut, and cut deeply, may be such a blow that he chooses to ignore the steps he needs to take.

So, what does it take to downsize effectively and remain profitable? A detailed plan. And that plan is your budget(s). Now, as one year ends and another is about to begin, draw up a budget that projects how you expect 2011 to end: anticipated volume (be completely realistic), job costs (by percentage, not by category), overhead (detailed by line item), and net profit (do whatever you have to do in the overhead category to allow for an 8% net after owner salary).

You may feel better if you do three budget scenarios. One is for a volume that’s slightly better (+10%?) than you would realistically bet on at this time. The second is the realistic budget. The third is the “fallback” or worst-case-scenario budget where your volume or your gross profit is 10% poorer than you currently anticipate. This third budget would include decision triggers, points where you’d take certain actions to bring overhead into line with that budget.

By the Numbers

Once you’ve developed the budgets you can believe in, break down the realistic one to monthly income projections and expenditures. Don’t simply divide each item by 12. Instead, research how you expect your income and expenses to fluctuate. This can be entered into your accounting software and a monthly budget-to-action report generated for your company. You would receive this report along with your profit and loss statement (P&L) each month and it would alert you to key variances.

One area to be particularly aware of is marketing. There has been a major change in the amount that remodelers need to spend for adequate marketing. The budget used to be 1% to 2%; now it’s 4% to 5% for full-line remodelers.

Then with plan(s) in hand, all you need to do is review those monthly P&Ls, do a budget reconciliation at least quarterly, and keep your company on track with your best friend in a recession: your budget.

—Linda Case is founder of Remodelers Advantage, a national company that gives remodelers the tools to achieve consistent profitability and success through one-on-one consulting, the Roundtables peer program, and an online learning community, Advantage Associates. 301.490.5620