Contractors have to bring an extra helping of conservatism to their business activities if they hope to make it through the typical construction business cycle. Times have changed. Business cycles have changed. Cash management procedures have changed. In short, it is easier today for you to get into financial trouble.
The tried and true business and financial axioms really apply to contractors; forgetting to apply them on a regular basis leads to serious problems. For example, take sayings such as:
- Cash is king!
- Every $1 of new sales requires additional permanent capital.
- Don't expect what you don't inspect.
- Time is money.
- You have to run the business and not work in the business.
- Plan to do what you need to do, and do what you plan.
Put all of these together and you can sum things up in two words: "focus" and "cash". Cash generation is really the only result that counts and you can only generate the cash you planned on producing by focusing on the plan.
Plan to reduce risks
Contractors are normally in one of two positions - great or poor - and seldom in between. We could probably push more firms closer to "great" if they would adopt somewhat of a more conservative business approach by paying closer attention to business activity and cash flow.
Notice I use the word "somewhat". After all, contractors normally accept more risk than other business leaders may be willing to accept.
Contractors take work where and when they can find it. They produce budgets and bids under tough circumstances. They are reluctant to walk away from a job that does not fit their expertise. They are not willing to lay off excess help. They take on too many jobs for the size of the company they have. They do not understand the capital needs of growing the business. They feel they have to go the extra mile to keep a long-term customer happy. Many do not plan properly, nor manage cash flow properly.
In short, contractors are an optimistic bunch who believe they can work their way out of any obstacle they face. Add this lack of discipline together with normal industry cycles, and you get a higher than normal risk of failure.
To avoid these risks, you need to produce a strategic plan for your business. As part of this plan, the CEO needs to establish what business your company is in, what you do well or can do most profitably, then stick to it.
Using this approach helps avoid the contingent liability associated with this industry. By sticking to a plan, you are working in a familiar environment, know the cost structure and can easily budget and bid the work properly. In addition, you will have a better feel for how the job is progressing and what steps are required to avoid costly mistakes.
As contractors, you operate in an industry that requires tough decisions. This in turn requires leaving your ego at the door, reviewing your financial results as well as backlog, and taking the safe way out to protect profit and cash flow. You also have to know how much new business you can support with your current capitalization and not venture beyond that point. Tough decisions to consider and tough decisions to make, but necessary ones to ensure profits and solvency.
Oldies but goodies
So let's go back and review the axioms previously cited and see how they apply to your business:
- Cash is king! - There isn't much to explain here. As a contractor, you have to know your cash position every day. No cash, no business. Take on more business and cash will decrease. Will your reserves sustain the growth?
- Every $1 of new sales requires some amount of capital - This relates to the cash comments. It is very difficult to stay ahead of working capital requirements without additional capital to support growth. Take on work beyond your plan limits and you are asking for trouble.
- Inspect, inspect and inspect - You have to run the business, which means knowing what is going on each and every day. How you do that is up to you. You can inspect on your own or have your foreman supply a report for your review. If you don't keep a watch on the important stuff, it will sooner or later become a problem.
- Time is money - This statement has never been truer than in the construction business. They even have TV programs based on this exact topic. Construction work needs to get completed on budget, which means on time. The more time it takes, the less you make.
- Plan out your work for the period and stick to it - This sounds simple enough, but it isn't. There are too many distractions contractors face that make this goal difficult to achieve. Discipline is the key to making this happen. If you don't have the make-up to follow this course, find a partner who does. Without discipline, the desired results will not happen.
You have a tough business to run. But you can avoid a lot of the pain that goes along with it - and make money - if you focus on what you do best, work within your financial framework and keep your eye on the ball every day.
Garry Bartecki is director of dealer/distributor services at BDO Seidman, LLP of Chicago, as well as a consultant to the AED. He has also worked as an independent CPA and consultant to equipment dealers. He can be reached at (312) 616-4677 or firstname.lastname@example.org.