By Jeff Roziere, CET, Siere
Take a hard look at your financial situation before bidding on your next project
There isn’t a business owner who isn’t fundamentally aware of the idea that “cash is king.” There is simply nothing more important to get a handle on if you want to succeed and grow in business. Unfortunately, too many times, business owners can get so focused on their trade or on getting the job done that they take their eyes off the money and find themselves in a pinch.
So why exactly is cash so important? A business must finance the cost of operation from the time they take on an employee or purchase raw materials, through to the point that someone pays the bill. This period can be days, but more than likely months and months. The longer the period or the bigger the company, the more cash you need to “spin” to keep the whole thing moving.
Aside from the fact that holding cash gives you peace of mind, a physical cushion and less sleepless nights, more importantly in the construction industry, it determines where you play in the game of contractors, subs and sub-subs. Your ability to move up is directly dependent on your ability to “spin” cash. The more cash you don’t have tied up in one job, the more you have available to bid on the next one.
Here are some things to consider if you are looking to take back the “cash” throne:
Manage your debt
- Debt is a fact of life for many business and very few are running debt-free. If the cost of the money you borrow is lower than the return generated by putting that money to work, it makes sense to borrow.
- Make sure to keep an eye on your borrowing costs, especially those variable rate loans. Don’t forget to look at options with lenders and accountants to identify cash flow opportunities.
- Invest in the things that are going to make you money, whether that is services, equipment or people. When cash loosens up, it is great to be able to buy those “nice to haves,” but make sure you don’t fool yourself into believing they are an investment. Be honest with yourself about the value your investments are bringing to you.
Forecast your cash needs
- The toughest time to get money is when you need it. It pays dividends to continually be forecasting what your cash requirements will be – not next week, but 30, 60 and 90 days out to make sure you have the time to react to cash shortfalls. If you don’t know how to do this, either learn or pay someone to help you.
- If through the forecasts you identify a shortfall, do something about it right away. Have a conversation with your suppliers, lenders and contractors now so you have the ability to negotiate the conditions you need, rather than getting caught.
- Build your lines of credit and borrowing capability over the long term so you have the buffers you need when you need them.
Chase the money you are owed
- When it comes to collecting money, the squeaky wheel does, in fact, get the grease. All businesses are constrained by cash, so if they don’t have to pay you, then it is money they can use in their own operation. If they know you will be calling, then they are more likely to make sure the payments are made on time.
- Be sure to invoice as soon as you can and make sure your invoices are clear and concise. Invest in systems to manage your expenses or it will cost you. The longer you wait to invoice, the longer it takes to get paid, and if there are questions about what you are asking to be paid for, then it will delay the process.
Don’t let your eyes get bigger than your pocketbook
If you are given the opportunity to bid for a new contract, stop and do your homework. Ask yourself some questions: Can I afford to buy the materials associated with the job? What would happen if the project was delayed by 30 or 60 days? Do I have the staff and the cash resources to pay them? Can I manage the extended payment terms of the bigger contractor? If yes, go for it, but if you are wondering, then don’t take the risk.
In the construction industry, just as in any business, if you don’t have the cash to operate, then you won’t survive. There are lots of other contractors who would be more than happy to take your place. It doesn’t matter how good a person you are or how great the quality of your work. There are very few companies, up or down the chain, that are able to cash flow your company on top of their own. Someone is going to be the king, so invest in the knowledge that allows you to be the king of your kingdom.
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