Hopefully, many of you will be reading this on a beach somewhere in Florida. Isn’t that where most contractors head once the cold weather hits?
As long as you’re there and have some time on your hands, you may want to ponder what 2016 will bring for business opportunities and how you are prepared to deal with those opportunities should they develop as you predicted... or do not develop as planned.
Hey, we all know about Murphy’s Law and how it can impact your game plan, budget, timeline, financing availability or whatever, and most of you are pretty good at turning chicken manure into chicken salad. So it’s safe to assume that if you plan out your year using two or three different scenarios, you’re less likely to be surprised when it hits the fan, and have a good idea what options are available to correct the situation.
When I use the word “situation” or refer to “results,” let’s be clear that I am talking cash flow, pure and simple, and that is what you should be striving for when doing any type of business planning. This is especially important for contractors because of the many variables you need to deal with in addition to Murphy’s Law.
Ever try to figure out how your cash flow works? It can be a very educational experience if you run some calculations for one of your typical jobs. The timing of your disbursements vs. collections, even with bank financing to help out, can get scary if you don’t get the billing out and collect your money.
And just because business is pouring in does not mean you are out from behind the eight-ball, because you are not. Every dollar of sales requires some permanent capital. In short, you can “sell” yourself into bankruptcy if you don’t understand the capital requirements for your type of business.
Topics to Ponder in 2016
So to help out with your 2016 planning here are some topics to consider:
- Check out how you did for 2015 in terms of what you expected and find out why you didn’t get the results you contemplated. Adjust your estimating process for 2016.
- Construction is expected to be strong in 2016, but obviously you know your individual market better than I do. Nonresidential should remain solid but start tailing off in the latter part of the year.
- U.S. firms are expecting to pay workers 2.9% more in 2016 over 2015. With the lack of construction workers in many markets, that pay scale may have to increase.
- In December, the Fed announced plans to raise interest rates, and I suspect that once they start increasing them, they will continue to move up. This will impact the construction industry in general and probably not in a good way. So if you have any borrowing to do, it may be prudent to do it sooner rather than later.
- Congress also announced passage of the tax extender bill, which approves Sec. 179 expensing for 2015 and beyond at the $500,000 level and reinstating 50% bonus depreciation. These changes may have some benefits for 2015 that you didn’t expect, along with an incentive to buy some new or used equipment to make use of the tax benefits in future.
Speaking of equipment, I’m hearing that many contractors are reviewing their internal equipment fleets, selling off under-utilized units and switching to equipment rental instead of ownership. The American Rental Association rental penetration index continues to climb.
There is software you can use to manage your equipment fleets that basically mirrors rental company reporting in terms of time and dollar utilization. The analysis that rental companies use to decide when to add or reduce units in their fleets should be utilized by contractors to make similar decisions.
The rental market for 2016 should continue to be soft because of the glut of equipment in rental yards. Used equipment values are down and rates are very competitive. This condition will of course correct itself as fleets are downsized, but until that time, contractors should be sitting pretty.
On the other hand, if you have a quality rental house working with you, and it has the equipment you normally need, it may be prudent to work out some pricing for 2016 so that both parties can sleep nights.
In my mind, there is a lot of infrastructure work that needs to be done on the city, state and national level, and sooner or later this work will present itself. We may have to wait until after the election, but it has to come as part of the solution to pick up our economy.
So smear on some more suntan lotion and start figuring how much cash you are going to generate in 2016.
Have a great year!
Garry Bartecki is the managing member of GB Financial Services LLP and a consultant to the Associated Equipment Distributors. He can be reached at (708) 347-9109 or email@example.com.