My building materials company: buying a year ahead

Decision card

Signal

Once a year I had to decide which items to buy, and how much, for the year ahead, with €1M+ in annual revenue. About $400,000 of stock stood in the warehouse. A mistake one way freezes money on the shelves; the other way leaves the crews and the customers without material.

Decision

Build the forecast from three things: consumption of each item, who of the customers buys how much, and my hypotheses about the coming year.

Action

Once a year the purchase for the whole year was made from that forecast: which items and in what quantities.

Outcome

The forecast came within about 5% of what actually happened.

Learning

Today I would write each hypothesis down separately, with a date to check it, and at the end of the year see which ones held. Then I would know not only how accurate the forecast was, but why.

At twenty I founded a building materials company with €40K invested. Within three years it reached €1M+ annual revenue, and within four it had its own warehouse, its own installation crews and about $400,000 of stock on hand. I sold it after five years.

One decision a year

Once a year I made a decision the whole next year stood on: the purchase. I decided which items to buy, and how much, for the year ahead. Buy too much, and the money sits in the warehouse. Buy too little, and my own crews and the customers run short of material.

I worked it out from three things. First, how much of each item had gone. Second, who of the customers buys how much. Third, my hypotheses about what would change in the coming year. The forecast came within about 5% of what happened.

What I would do now

Back then I decided on my own. Today I would write each hypothesis on its own line: what it rests on and when to check it. Consumption and customer volumes would come into a morning brief from the books. And at the end of the year I would see which hypothesis held and which did not, and the next forecast would stand on that.

What this has to do with general contracting

A general contractor also decides ahead: which material to order for a job and when, sometimes before prices go up. The figures for it are usually already in the company: in the estimates, in the progress certificates, in the bank. From what I see, they are rarely brought together by the time the decision is made. That is what I build for owners: so the figures are on the table at the moment you decide.