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What cycle? The business cycle, of course. It's amazing — business cycles have been doing their thing for the last 100 years, yet the corporate and media worlds act like it's something new every time there is a slight downward movement in key economic indicators.
Business goes up and it goes down. The contracting business goes up and down, depending on what you do; where you are; interest rates; the season; the size of your company; how all levels of government release funds; and your ability to get adequate working capital to fund projects.
Inventory levels — excessive inventory levels, to be exact — stimulate most downturns. But within the last 10 years, the availability of real-time data and more data types seem to have brought this problem under control. Consequently, even if there was a recession (according to the definition used by the Feds), it has been shallow and short. Why should this one (if there is one) be any different?
Keep cash flowing
Where do you as contractors fit in this situation? Interesting question. On the one hand, you have more flexibility, meaning if you decide you need to make changes, you can usually do so faster than a manufacturer or wholesaler. On the other hand, you may not have the data you need to react in time to use that flexibility to any great advantage. Having the ability to judge the market with a game plan in hand, then make quick decisions could mean all the difference in the world.
Putting all the hype into perspective — the media, the election jargon, the Fed statements, Wall Street interpretations and the banking industry's reaction after making their own mess — contractors only need to think about one thing: Cash.
Cash is the only thing that counts under current economic conditions. Find out how much you have and account for all entries into and out of the cash account on a daily basis.
You can delegate some of the record keeping, but you need to have this understanding yourself. You need to know:
- who paid
- what was billed
- which invoices came in
- what vendors you need to pay
- how much you need for payroll
- what you need for bank and lease payments
- what payables you can hold and for how long
- who pays their bills
If you don't know these details, you will have a very hard time making a timely decision to cut back or expand the business.
Given the current economic climate, you also need to take a conservative approach by making sure you are doing business with people you know will pay. In short, now is not the time to take risks. Efforts should be made to work the A and B accounts to the max to get as much business as you can. Jobs that sound too good to be true probably are.
Good business practices require timely billing to accumulate cash. Billing has to be completed ASAP. It must also be done correctly with proper supporting documentation to avoid time-consuming interaction between you and your customer's accounting department. Do it right and pursue payment as soon as the aging hits 30 days.
Getting billing out in a timely and correct manner means having the necessary records in place. Your system has to be properly operated to generate the data you need. If you were ever going to take the effort to make this happen, now is the time to do so.
Review your situation
Frequent meetings with your banker are a must to get a feel for market conditions and how the bank is reacting to the contracting business in general. You all know how it goes. One day, the bank is in the contracting business, and the next day it's not. Being on top of this issue will give you time to shop for other resources.
Fixed costs also need a review. It's a perfect time to analyze which equipment is being adequately utilized and which should be sold. With the foreign markets being what they are, used equipment values are higher than normal. Anything you can do to lower your fixed costs will help you conserve cash.
As stated last month when we discussed the Economic Stimulus Package, there may be tax money available from tax carryback claims. If your plans call for equipment acquisitions, you have to figure this into your financial plan for 2008. Knowing you have carrybacks available may allow you to reduce estimated tax payments for 2008.
If you have the cash account under control and are paying bills in the normal course of business, you will make it through this business downturn with the ability to make even better inroads into your markets in the future. This is no different than the old saying about it being a good day if you have one additional dollar in your pocket at the end of each work day.
So get out your pencil, calculator or laptop and start tracking your cash each and every day. It's a good habit to get into no matter which way the economy is heading.
For more information, visit www.ForConstructionPros.com
Garry Bartecki is director of dealer/distributor services at BDO Seidman, LLP of Chicago, as well as a consultant to the AED. He has also worked as an independent CPA and consultant to equipment dealers. He can be reached at (312) 616-4677 or gbartecki@bdo.com.
author: By Garry Bartecki