Stay Fiscally Efficient in 2008

While 2008 looks positive, it?s important to have a backup plan in place.

In mid-January, I had just returned from the Associated Equipment Distributors (AED) convention in Chicago. AED's members in the construction and rental markets were accompanied by banks, equipment manufacturers, service providers and insurance companies - showing up 2,500 strong with many of those attending wondering what is going to happen in 2008.

I, too, wanted to know what to expect in 2008, and thus concentrated my conversations along those lines, with special efforts made to attend discussions presented by economists and industry analysts. I also made it a point to ask each manufacturer I could find the same question: "What are you hearing from your dealer network about 2008 activity?"

At the end of the meeting, I was pleasantly surprised and could comfortably say 2008 should be an okay year for most contractors. The exception would be those really in a niche housing market who can't divert their skills to one of the healthier construction markets. But if they can, they should come out okay.

Equipment pricing trends

Taking this analysis a step further, it appears the equipment markets will be similar to those in 2007. I would not expect any significant price increases in new or used equipment, nor in rental rates for general construction equipment.

New equipment prices for some equipment may be soft this year, because the national rental companies do not seem to be buying as much as they predicted. On the other hand, there may be some late-model, low-hour equipment on the market as a result of rental companies downsizing their fleets. If I had to guess, new or fairly new equipment should be available at attractive prices and, if you have good credit, at attractive interest rates. Anyone who has been holding off on equipment purchases may find that 2008 is the year to proceed with those plans.

There is, however, an international market for certain equipment, slowing the expected softness in the used market. The same can be said for new equipment where manufacturers have established markets outside the U.S.

Those of you who feel uncertain about the economy, particularly in your region, should really consider using more rental for your equipment needs. Use it, pay for it and give it back if things slow down. Better yet, use it on a job-by-job basis and charge the entire rental to the job with zero overhead cost on your part. Find yourself a rental salesperson you can live with and let him/her do the work. Or maybe find two sources to work with to avoid problems with delivery schedules.

If you have under-utilized equipment in your fleet, you can rent it out yourself or even offer it to a rental company as a re-rent unit. (The rental company rents the unit from you, then rents it to others.) Just make sure you have pictures of the unit and notes on any repair issues, along with a list of any restrictions you are placing on it. For example, if you don't want the unit to be used by painting contractors, then say so.

Evaluate operating expenses

On the operations side, it pays to be as efficient as possible during these somewhat uncertain times. You need the work completed properly and on time. Consequently, there is a need to maintain a certain "management" level within your personnel group. Good people are still hard to find. Keep the good ones, especially those with the experience to manage a job in the field.

Now is also a good time to rethink operating expenses, especially those that show up every month. If cash is short, equipment may need to be sold, receivables collected and expenses reduced.

To reduce expenses, outsource all you can to reduce payroll costs. Use your bank and other service providers to help with record keeping. Make sure you have adequate payroll records. There is no doubt you can reduce each operating expense line item by at least 10% if you try.

It is also a good time to budget for two or three scenarios. That way, you have a game plan you can get to should your actual results move away from the optimistic budget to the pessimistic budget. As the Boy Scouts say, "Be Prepared".

One real area of concern should be your banking relationship. Banks are not leaning to do much business with the construction industry. Don't push them too far or they may decide they don't want to be in the industry any longer. What you don't need right now is to be looking for a new banking source. Keep the current relationship strong, get them your info on time and keep your books clean. Don't overextend yourself if you can help it.

Manage your business, watch the cash flow, keep expenses and cash commitments at a minimum and you should survive 2008. Now, 2009 is another story.