October 2007: Straight Answers to Tough Questions

Q:
I would like to know if you have any books regarding contractor’s survival. Our business is very slow right now and we need tips on how to survive without adding more overhead.

Thank you.
Hannah Barrizo
Palm Island Design Builders Ltd.  

A:
Survival is not an option! It is slow death. Don’t you want to thrive and prosper at all times? Why is your business slow? I know the economy might be slower, but what are you doing about:
    – Finding new customers?
    – Offering more or new services?
    – Implementing a marketing plan?
    – Creating customer relationships?
    – Taking your top ten customers to lunch or a ballgame?
    – Expanding your project type or customer base?
    – Providing maintenance as a service?
Without changing your business model and trying new things in a slower market, you will go backwards and lose all your hard-earned money waiting for the tooth fairy to arrive. Are you willing to make necessary changes to be successful in both good times and bad? It’s too easy to sit and wait for something to happen, keep doing business the same way and hope for some good news. It’s hard to try new things, new customers, new project types, new employees, new services, new marketing ideas, new subcontractors, new contract methods, new project delivery methods and new ways to run your business. Every day you sit and wait, you spend money you’ll never see again. The choice is yours. Face slow death or go out and make difficult decisions.

Q:
Our organization reads your articles in Construction Business Owner and discusses the content regularly at company meetings and planning sessions. In a recent article, you discussed cash management and stated a company should be finding 20 to 40 percent returns on its cash management for each $1M in revenues. We would like to know more specifics and what things you’re including to achieve 20 to 40 percent returns. For example, do these figures include bank interest, purchase discounts, cost savings on purchase versus financing, and equipment purchasing versus leasing?
Layne Birling
Quest Ventures

A:
Thanks for your interest in making more money than the average contractor you compete against. The construction business is tough without using every trick in the book. First, meet with your banker and discuss cash management programs. He/she should have investment programs to give you interest on your daily bank account balance. And to get a higher return, ask them about overnight investing and short term CD’s to maximize the return on your account. If they don’t have these options, find another bank with full services and high rates for your cash balances. For a company doing $1 million a month, the average bank balance should average $500,000 to $1 million at all times. If invested at 5 percent, this can make you $50,000 per year.

Also use your cash to take advantage of all discounts available. For example, concrete suppliers generally offer discounts of $2 to $3 per yard for pay within ten days. For concrete contractors doing 1,000 yards a month, this can add up to $30,000 or more per year. Meet with your suppliers and demand significant discounts for quick pay. Also, many subcontractors are in a cash crunch from time to time. Offer them an early pay option at a discounted amount. We get a 2 to 3 percent discount from our subcontractors if we pay them thirty days before the funds are anticipated to be received. This saves us another $50,000 per year.  The problem with most construction companies is they are under-funded and cash poor, which doesn’t let them take advantage of all money-making opportunities good cash management creates.

Construction Business Owner, October 2007