Replies

1. 
   DanH | May 09, 2011 09:24pm | #1

   Speaking as someone not in the business (and not wanting to get into the business), I've seen many instances of contractors getting into money trouble and then digging themselves deeper and deeper as they attempt to recover.  I don't know how much cash you need, but if you get into a situation where you're using the downpayment from project B to pay to finish project A then you're on a slippery slope.  You need to make sure you'll have a chair if the music stops.

2. 
   MikeSmith | May 10, 2011 10:49am | #2

   some of it depends on how you are organized as a business... sole prop.... chapter s..... llc  , etc

   you have a savings account for your personal life , right ?

   if you are organized as a corp .  or  an llc.. you can lend money to the business form your personal account

   you  need  cash flow to   meet your obligations and  to take advantage of discounts..

   if you are late paying your bills....you pay interest... if you pay within discount terms you get  credit

   say  you  have vendor bills of  $10K / month... 2%  paid by 10th..... $200... x  12 months =  $2400.

   if you are late, maybe they charge you  5%... $500 interest  x 12  months  =  $6000... that's a swing of  $8400.

   if you have  positive cash flow, you can pay your subs when they do the work.. on time... the work gets done, they get paid...  guess who your subs would rather work for  and deliver  timely  completions... you.. paying on completion... or your competition...  stringing them out  30  ------ 60---- 90  days ?

   your payroll... the money has to be there....... and  you should pay yourself first...  YOU are the most valuable employee.. so  the money... and the withholding taxes... and the insurance  premiums......  all gotta be there... 

   your source of  money  can be  savings.... or   the bank... your customers should be your bank... you should never be their bank..

    your payment schedules  should reflect this... deposits... progress payments.... final payments

   from day one ... you have to build and protect  your reputation... for honesty... credit worthiness.... timely  delivery of work

   so.. yes .. you need  working capital.... but you shouldn't be using  your capital.. it should  just be there

1. 
   Sunburst1 | May 10, 2011 08:32pm | #3

   Thanks very much for the replies, I appreciate the advice. It seems having adequate working capital is one of the most important items in starting up. I sometimes feel that more work would come my way if I had better controls in place for general contracting (like employees, subs, etc.) so its tempting to jump right into that market, but if I quickly blow through my capital and go into debt like you mentioned that would be very bad. I guess I'll try to save as much as I can and hopefully someday I can do it right. Thanks.

1. 
   DanH | May 10, 2011 09:45pm | #4

   I'm not sure it's a matter of having a lot of capital or meeting some specific benchmark so much as it is having some sort of discipline and carefully managing your cash flow.  And, as always, a little bit of luck.

   The unfortunate fact is that many (perhaps most) wood butchers are just not mentally equipped to be businessmen, and thus are better off working for others, one way or another.  To be a successful building contractor having building skills is probably the least important trait.  More important are management skills, accounting skills, and sales skills.  Unless you have a wife, family member, or trusted associate who can fill out this list of skills, you'd better think VERY carefully before jumping in.

2. 
   oops | May 10, 2011 11:57pm | #5

   Working Capital

   I know that money is tight right now, but have you talked to your friendly banker about establishing a line of credit. You would need to prepare a business plan, but you should do that anyway for your own benfit. You need a plan for getting the work, financing the work and doing the work. Often doing the work is the easiest part of it.

   Good luck.

3. 
   whittlehome.com | Jul 08, 2011 02:42pm | #10

   Cashflow budgeting

   A business's cashflow is nearly impossible to forecast with certainty, even for the most experienced builder.  But it can be done with reasonable accuracy if you sit down regularly and look at what is coming in and what is going out.  You can enter those inflows and outflows in a spreadsheet like this one: http://office.microsoft.com/en-us/templates/cash-budget-TC101877504.aspx, or use quicken for business, or just do it by hand.  Either way, it's important to remember that if your business has several projects ongoing with varying duration, your cashflow will inevitably rise and fall like a tide.  Just because you are negative for one or two months, doesn't mean that you are not profitable overall at the end of the year...however, how you deal with those negative tides will determine whether you will be around long enough to capture those positive inflows down the road.  It's tempting to go for extreme safety and say that you want x amount of dollars in the bank, to cover down months, but that's just guessing.  There are other ways of dealing with temporary negative balances, including extending your payables (in return for paying a bit of interest to willing vendors), or tapping a line of credit with a bank.  Family and friends may be willing to provide short term financing to you if you offer an attractive enough interest rate.  My point is, don't just pick an arbitrary number for working capital...guidelines are guidelines.  Get it all out on paper and do the math...then you'll begin to see where your expected negative cashflow periods are, and you can make plans to cover it with the least costly financing alternative you can find.

   Whittlehome.com  "Quality through the roof, since 1952."

   For nearly 60 years, Whittle Construction has been a builder of top-quality homes, offering design-build residential and commercial services throughout the Rogue Valley of Southern Oregon.

2. 
   cussnu2 | May 11, 2011 11:09am | #6

   "your payroll... the money

   "your payroll... the money has to be there....... and  you should pay yourself first...  YOU are the most valuable employee.. so  the money... and the withholding taxes... and the insurance  premiums......  all gotta be there... "

   I understand what you are trying to say by saying pay yourself first but legally you have to pay your employees.  If that means you go without a draw, tough cookies.  If you draw cash out of the business and don't pay your employees, you are in deep doo doo.

1. 
   MikeSmith | May 11, 2011 01:52pm | #7

   of course

   you have to pay your employees... don't be daft

   the problem comes  that  most small businessmen  start treating the business as a hobby

   it's a business...   the guy running the operation is an employee just like all the rest

   so the idea that you pay everyone  else first  is  how you end the year with nothing ot show for it

   you have to structure your business so that everyone gets paid... ESPECIALLY the boss

   if you have to choose  wether some employees will be paid and others will not be paid.. then you should  close the doors

   too often, companies postpone the inevitable by not paying  the boss  as  the path of least resistance.

   if the company  cannot pay the employees , they  should lay them off

   they shouldn't rob peter to pay paul

   the discussion is about  "cash flow"  and "working   capital"

   my point is that  the product has to be sold  at a price point that includes all overhead..  and paying the boss had better be  included in that overhead

3. 
   Sunburst1 | May 12, 2011 08:52pm | #8

   "even then thought I'd need

   "even then thought I'd need 100K as a startup cushion, so did not start"

   Wow...

1. 
   calvin | May 12, 2011 09:43pm | #9

   Don't panic

   I didn't have nor do I now, a hundred thousand to back my business.

   However, I have a line of credit I could access that surpasses that by a long shot.

   Reason being, the last time I went on my own (almost 25 yrs ago) I promised never to start more than I could finish and to never extend myself beyond my ability to cover.  This meant not taking the plunge when "stick with me and you'll.........." was dangled in front of me.

   I have remained one man with a fine group of reliable subs and only gross about a hundred fifty thousand a yr.  Am I rich?  no way.  Am I poor?  nope.  It does take more to make more, question being how much you got and how much risk are you willing to take.

   With the right payment schedule and the proper completion thing going on as well, you can stretch yourself a little bit more.  DO NOT, go too far.  Doesn't take much to stretch it till it tears and then the whole shebang falls apart.

   A fluctuating economy doesn't offer much of a grace period. 

   Just rcvd a notice from a large roofing/window/kitchen supplier.  They show price rise in the last yr for petrol based products including fuel-pvc, roofing, vinyl.....................each one averaging about 40 percent.  Pretty damn volatal.  You bid roof material and even after order, jumps in price b/4 delivery.  The margin isn't that large on material markup to compensate for drastic changes.

   You must include a proviso in your contract dealing with potential material cost rise.  Otherwise, you might as well take your cash to the race track.

   Best of luck.