April 2008: Straight Answers to Tough Construction Business Questions

Straight Answers to Tough Questions

Q:
What else can I do to get my cash flow back?  My husband and I have a small welding business with five employees. We offer to take credit cards, and we have a credit line to help. I don’t pay bills until they are due, but I am struggling every month.

I have to be very diligent about my collections. I have some general contractors (we are the sub) who will pay, but I have to call first. What do I tell my vendors?  I have told them that I will send a payment as soon as I get mine, but that just isn’t acceptable. So, I borrow and borrow and borrow to keep everyone happy. When I do get money in, it is so late, that I usually need it to pay something else. And I can’t get anything paid back on my credit line. I haven’t used my credit line for the past three months. I have held people off until the last minute and have threatened collections to get contractors to pay.

I don’t like doing business this way, and I don’t want people calling me looking for payments. Until the last three months, the “borrow and payback” method has worked. Now, I feel like I have failed.  We have more work than we can do. Yet, we are broke. I sit at my desk everyday and have panic attacks. I go to the post office, only to find a mound of bills but never any money. When I do get money, it is the very smallest amount due.

We have noticed that our growth may be the problem. We rarely do anything that is under $20,000 anymore. But that is a problem, too-the bank won’t give us a bigger credit line. We have some equipment and a vehicle on payments. And every month I worry over the amount of bills I have to pay. I still have bills that are getting long past thirty days overdue, and I keep my fingers crossed every day that the vendors don’t call so I won’t have to pay them until they scream. What else should I do?  Any advice is greatly appreciated.

Linda King

King Welding

A:
I can’t fault you for trying to keep your finances in order. Several things bother me. First, you are growing your business without enough money invested in your company. You need at least three to six months of cash reserve funds to pay all of your bills and stay above water. Strong subcontractors generally have enough cash in their companies to pay their vendors monthly without waiting for payments from general contractors. The normal payment cycle working for general contractors is thirty to forty-five days and sometimes longer. Expect this and plan accordingly. Borrowing money is not a great way to grow a company. Every dollar you borrow costs you money. Lenders will not increase your line of credit until you show your equity and profit growing-not just your sales.

Secondly, are you growing by selling your services too cheap? Stop taking every job offered to you, and start making profit by raising your markup and grow your bank account. It seems like you are not making any profit.

Thirdly, you have chosen to work for general contractors who don’t pay promptly. This is your choice but not a good one. You need to find some new customers who pay their bills quickly.

You have a cash investment problem not a cash flow problem. There is no quick fix to your situation except a large cash infusion from an investor who will get part ownership in your business.

George Hedley is the owner of Hedley Construction and Hardhat Presentations. Call Hedley, the Construction Business Expert, at 800.851.8553, or visit his website at www.hardhatpresentations.com.

Construction Business Owner. April 2008