How Contractors Can Prepare for Financial Challenges

Conduct an honest business assessment, and take these steps to prepare for unexpected financial challenges.

A new year is upon us, yet no one seems to know what to expect. Clearly, most states are in a weakened condition, but the worst of the recession appears to be behind us. That is not to say we should start passing around the champagne. At best, 2011 will be a somewhat better year for most contractors, but the weakest of the weak still might not survive.

With a new year close at hand, it is important for contractors to conduct an honest assessment of their resiliency. Toward this end, every aspect of the business plan needs to be evaluated and various scenarios considered. Contractors need to know whether they can survive if revenues decline another 5 percent, 10 percent or 15 percent. If it appears such losses would make it difficult to survive, company leaders need to start developing contingency plans.

Contractors should begin the process by visiting with their financial partners, including their banker, bonding agent, certified public accountant, and insurance company. Lenders in particular need to be consulted without delay.: Because credit is still tight, contractors should sit down with their bankers to learn what new requirements may be in place next year. If possible, contractors should try to negotiate a larger line of credit now because that cushion could come in handy once the new year unfolds.

There are several steps contractors can take to prepare for inordinate financial challenges. Not all of them can be addressed here, but we can at least delineate a few of the most critical areas of concern.

Overall Spending: Now is the time for contractors to review this year’s spending patterns. Discretionary spending, in particular, needs to be closely examined: This year’s ancillary spending may not be so easy to justify next year. When it comes to capital expenditures, especially for equipment, it might be best to delay purchases next year. In fact, all planned spending needs to be weighed carefully against expected returns, and that includes wages and bonuses. When it comes to expenses, construction materials tend to be the biggest source of waste. In planning for next year, contractors need to make sure they order the proper type and quantity of materials on each job. If there was an inordinate amount of waste this year, the estimators are not doing a good job. With the cost of materials climbing dramatically, that problem needs to be corrected immediately.

Know Your Profit Numbers: Do you know what your profit target is, or should be? Many contractors really do not known’t. The average pre-tax net profit for general contractors is between 1.4 and 2.4 percent, and for subcontractors, it is between 2.2 and 3.5 percent, according to the Construction Financial Management Association (CFMA). With profit this small, there is notn’t room for risk. Owners need to look at the net worth of their company and then the projected overhead for the year. From this departure point, they can determine how much net profit they want to make and begin to track progress. While considering goals for net profit, contractors should considerbegin thinking about doing more to separate themselves from their competitors. One way to do this by offering new services in a different niche.

Job Costs: Owners need to sit down with their accountant now and get an accurate assessment of what every employee and piece of equipment is likely to cost next year. The labor cost review should include taxes, insurance, workers’ compensation costs, health insurance, vacation, overtime, small tools, training, pension, profit sharing, etc. Equipment costs should include purchase price, finance and interest, payments, insurance, maintenance, tires, gas and repairs.

Employee Benefits: Many contractors are learning they can reduce costs and attain the same level of employee satisfaction by re-evaluating how benefits are packaged and delivered. Health savings accounts, for example, may be an attractive option for workers.

Retaining Key Managers: During periods of economic decline, contractors more than ever need to keep their best managers. Most surveys show salary is notn’t the top job satisfaction criterion. What many employees want more of even more is an active role in decision -making, innovative benefits, deferred compensation, and upward mobility. By the way, it should be pretty clear by now that health-care benefits often determine whether a top manager goes or stays.

Cash Flow: Based on past years, contractors should be able to predict cash flow next year and budget expenses accordingly. By the way, if a contractor will be doing work for someone known for paying late, contracts need to be reviewed to make certain cash flow is protected in the agreements. What must be avoided is a late-pay scenario that actually leads to a shortage of working capital.

These are just a few areas that should be closely scrutinized as soon as possible. If the assessment makes it clear that major problems lie ahead, contractors should notn’t panic.: They just need to begin working with their accountant, banker and, ideally, a few outside advisers to develop an action plan of action. If that plan calls for the contractor to step outside his or her comfort zone, then so be it. All business owners need to be as flexible as possible when the economy is coughing.
 

Construction Business Owner, December 2010