In another thread, the issue of capital costs came up.
I know diddily about it really but somebody here does.
Half of what I do know is based on the fact that I lost a bunch of bucks once in a retail business that was underfunded. Shortage of cash was only one of the problems but it was a critical one. I don’t know how to calculate the right amt of cash a new business would need but I bet it’s worth starting a discussion.
For one thing, a retail business is based on selling goods. Those goods need to be ther on the shelf under the customers nose at the time he or she is ready to buy in order to make the sale. There’s an old adage, “You can’t sell what you don’t have.” that means that you have to have the cash to put the goods on the shelf.
Obviously, retailers need more goods than remodelors, since we are selling a service. If you sell a daily service like day laborers do, and get paid on completion, then you need no capital at all, since you are never out any cash.
I am at the point where I bill monthly for most things. The great majority of my customers pay within ten days so if I figure for an additional ten day grace period for the other ones, I need to have available 2/3s of my monthly gross for working capital, if I want to keep myu subs and suppliers happy and on top of their lists. Another adage that applies here is that the Money makes the wheels turn. Slow the money and production grinds down too.
Theoretically, in a perfect world, I don’t need any working capital of my own because I go into a large job with deposits up front and a payment schedule that keeps me leading until near the end of the job when I am billing the finals in arrears. by that time, I am generally far enough in negotiations on the next job to have a deposit for it as I am finishing the prior one.
Another need for capital is for shop space, equipment, and for inventory. Most materials in my jobs comes straght from the lumber yard and my money isn’t tied up since I get paid for it about the same time that I have to pay the bill. ( managing your own billing and your customers is important in this regard to maintain cash flow.)
But I have a few items like nails for the guns and screws that I stock. I buy screws by the 2000 count box and sell by each or by the pound and mark them up for the stocking pleasure. If my business were something like electrical or plumbing, I would need to stock a large inventory of different items like this. That means that some service companies need more cash to tie up like retailers do. Probably the value of the inventory plus the amy of the monthly gross in cash.
All of this gets modified by individual circumstances too, like the retailers who get a lot of floorplan sponsoring from manufacturers. What kind of things affect your cash needs to fund a business?
Excellence is its own reward!
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Good topic, thanks.
The Count-Down begins, 97 days left
This is a huge important topic! CAG when Piffen says "In another thread, the issue of capital costs came up." was he talking about you? Is that what 97 days refers too? If yes just "what" are you starting up because that has enormous relevance. Just what and where was this other thread?
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Jerrald,
Nope, not starting anything, the 97 days is a count-down until I graduate. I just really liked the topic, and I like the business threads more then the construction based threads these days.
Just trying to learn as much as I can, because inevidably one day, I'm going out on my own, just hear to read and learn as much as possible, I'd rather learn as much as possibel from books/articles maybe even school and other's mistakes, then my own is all...
The Count-Down begins, 97 days left
Graduate from where? Studying what? You wouldn't happen to know what the thread he was referring to was would you?
I've been thinking lately that I want to go back to school so along with one of my sister-in-laws were researching and looking into the colleges with online programs although there is also a really good graduate business school very close to me too.
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I'm no expert in this area either but I will tell you how I did it and also how I would do it if I had to start out all over again. I started with almost nothing around 1990. Old truck and some borrowed tools. I was young single and had no real bills to speak of. Took a lot of work on rental houses, apartments, a lot of quick and dirty painting jobs. Never got any money up front, but never got burned. Took about 5 years to really start making enough to live on. About 35k at that time. Still had no capital but a couple of credit cards. Got my G.C. liscense along the way and worked to get a much better set of customers. Still had no real capital. Was making 50 to 60k per year and scrambling every month to pay bills and suppliers on time. Didnt take my cut untill everyone else was paid. It was neverending stress and one bad job could have bankrupted me. By this time I was married and had a house as well. Took out 10k equity on house and used it to start paying myself a salary every week. Best business decision I ever made. Now I have a line of credit with the bank for what I consider 6 months worth of salary and enough to keep the business going in a worst case senario. I get a third up front on most jobs but some commercial jobs are impossible to work that way. The stress is way down and profit is up. Everybody gets paid on time and if someone is a couple wekks late paying me its no big deal. If I were going out on my own today I would make it my #1 priority to get some type of startup capital. Private investor, bank, savings, whatever it took. A lot of people dont want there house tied to the business and I can understand that. It is one way though. The amount of startup would be dependant on a lot of things, lifestyle,responsibilities, and the type of construction you do. In the remodeling business I am in I think 30 to 50k would be a good start.
that's not a bad target.
On bigger jobs, I can easily be drawing payments of seventy thousand a month. If the customer gets shanghaiied in Timbuktu for a couple of weeks out of contact, I'd be up the creek which is one reason I structure my payment schedules to keep me advanced.
But there are occasions where the payment is delayed for a week or so and the line of credit is invaluable. Seems to always happen around taxtime when my money is flying "thataway" too!
.
Excellence is its own reward!
I really don't remember what the other thread was. Charlesc was there - but I think we just sort of slid into this as an aside and that thread didn't really have much to add to this..
Excellence is its own reward!
"The Count-Down begins, 97 days left"
CAG,
What are you up to here? And... I thought you were thinking about getting married. Cash reserves are important if you want to stay in business (and out of bankruptcy) when realities don't follow plans.
I graduated in the top 20% of my class from one of our nations best B-schools (UW-Madison). Can't tell you how much they focused on planning, planning, planning. Leveraging, etc. Maximizing profits. So much was hogwash.
Having funds reserved [in safe investments] for a rainy day was almost always...not thought highly. In good times it may not matter. When bad set in, it's those that had the funds in reserve that survive and prospered later.
Jon
good timing.
I just took a babystep in the right direction.
Just got the letter from AmEx confirming my little $10K line of credit. ( now I gotta start a bidding war over "me" with my local bank)
I had planned on starting back into remodeling with a little something in the bank first....that plan worked well till I was laid off unexpectedly on a Fri and had to make money the following Monday!
I started subbing with just me, myself and my tools. Worked for HO's only with enough money down to cover the materials. I never put myself...aside from my "salery" ...out for any supplies worth more than a coupla hundred bucks.
I buy materials when I can at places that take the trusty old AmEx ..when I have to buy an extra 30 days before I have to pay.
I've even finally got around to getting the credit app for my lumber yard ...might even fill it out this weekend......
Even when subbing .....I never start with out that 10 to 20% start check .....for jobs over $1K .....for jobs $1K and under......1/2 up front to start.
I take plenty of gambles in life ....I don't gamble with money! After getting burned once or twice .....I stand behind my theory that I'm a carpenter ...not a bank. I'm not gonna finance anyone else's job.
As to the line of credit.....got it with the thoughts of never touching it. Probably hit it a time or two to build the old credit even more......but only when the money to pay back is on hand. That's even why I applied now.....I don't need it right now.
And I've learned one thing in life ...banks only lend money when Ya don't need it!
I wanted to start low.......$10K was as low as they'd go. Might ask for an increase to something really useful over time....but I don't like the idea of borrowing/debt in general ..so I'll take baby steps.
I secretly pride myself that I've grown...ever so slowly ......started with nothing...and now have twice that......without borrowing any money.
I remember a story from Petefest ...actually a bunch of stories on the topic....with most of the experienced guys agreeing.....but Vince Carbone telling of a guy he was jealous of....guy kept growing and growing ...till he hit a dry spell ..and the house of cards came down......the guy was growing on borrowed credit. One or two bad jobs and he went under. He now worked as an employee for someone else...and was still digging himself out.
At least my bills only mount monthly. House isn't second mortgaged. Van's paid off. Tools are all paid for in full. My business might not add up to much ........as far as assets go ...but they're all liquid. If I need a job specific tool....it waits till the right job can buy it. A new van'd be great ....but the old van looks OK and runs great.
The way I wanna run things.....I can switch to employee ...or move across the country...in a minute.....as there is absolutely no business debt.
Probably a slow way to grow.....but when I get "there" ...it'll all be paid for and all be mine.
Jeff
Buck Construction Pittsburgh,PA
Fine Carpentery.....While U Waite
I basicly started with nothing too in this remodeling. I think many of us do, by stating out with moonlighting until we have enough clientele to go off alone.
I moved here with nothing more than a van full of tools and ehgt thousand dollars worth of old credit card debt and my skills.
I was burned out from working alone in a locatiuon where every single customer asked me to "sharpen my pencil" so Iwas only making wages at great risk. I went to work here with another build - great guys to work for but I saw from the beginning that the good old boy thing was costing them money. They were not business managers, mnorale was down for them too. I had "personality conflicts" with a couple other guys on the crews and elected to go on my own again. This was in '91 when the economy was not so hot either. I landed a good sized roof/siding job and spent the winter on it, just making decent wages again, buit by the time I had finished it, my reputation was pretty well seeded in here.
I have a line of credit at the local bank of 20K that was based on value of tools and average monthly billing at that time. I have another from Wells Fargo by telephone that they confirmed good based on my typical credit use at the local lumberyard where I oftern run 12 to 18K/month and keep it paid current. So I could lay hands on 40K
But that's not necessarily safe capital for purposes of this discussion. Like I mentioned nbefore in my retail business, the cost of credit when it went to 24% under Carter's administration was a killer.
Suppose that I had 22K out on a regular basis. The interest now is only about 9-12% on that but if it went to 18% it would force me to add another one percent to the cost of my jobs or eat iot. Would it be a ball buster? That depends on what else was happening to the economy and if it was inaddition to adding another two percent for insurance increases....
So it is much better to be working with cash capital reserves than borrowed capital. Besides, if an economy dived, the banks can call that money in immediately, leaving me dangling out in the breeze.....
Excellence is its own reward!
What kind of things affect your cash needs to fund a business?,, Belive it or not, piffin, for me, it's a state of mind. Thanks to my wife,(stay at home Mom) she is the one who reminds me that , our household needs- X- $'s, every month. It took me a long time to figure out that I could charge clients for my efforts versus working for wages. I'am not a betting man, so I try and keep my needs versus wants, clear in my mind and budget. Typically I don't do large dollar jobs, have in the past though. I make it as clear as I can with clients, that when I need money (theirs), for/on, their project, it is, due and payable. One thing of huge imprortance to me is paying my subs, asap, never in 30 days or whatever is stated on the invoice, so that said, that kind of thing = good credit around town. I might as well in throw in the word, Details- oh so many details in this business. Lastly, as you already know so well, piffin is the communication thing. Yours is a Tough question for me. Jim J
I guess that I've already alluded to it in the above responses but I guess that a months worth of gross is about right. I don't like the idea of depending on the credit so instead of waiting to be bent over for one percent of my gross sometime in the future, I am beginning to plan to set aside one percent to build a cash reserve fund. That way, even if I don't need it to finance my customers slow pay, I have it to open options for me, such as building a spec or buying property.
The personal finance thing does enter the mix for me too. I ahve always been rather fanatic about keeping one separate from the other, having run my DBA asa sep corp would be run and now am incorporating, but this past two years has been hard because my wife went thru cancer traetments and a year's worth of income would not cover all the bills connected to that. I amnaged to keep the business separate and viable and let the hospitals cry while I ooze just enough blood to them to keep their electricity turned on. My total medical bills every month run about $2200. I used to make a decent living on that much..
Excellence is its own reward!
That is an interesting reason to keep the business and personal seperate. Most of the time I think of it as the business side being seperate so as not to drain the personal side, but in your situation it is opposite. I guess you can always make more money to take care of the personal expenses as long as the business remains healthy. By the way my health care costs in 2000 were close to 250,000$. On the one hand I was lucky and the HMO I used then covered almost all of it, the bad part was that the poor care and lack of choice in care nearly killed me. I'd rather be alive and in debt than dead and paid up. More people need to pay attention to health insurance and disability because these problems come up more often than you think and often without warning. I had never been to the hospital for anything other than stitches, then at about 35 I was in for close to 9 months total with pancreas, liver and stomach problems. Even though I am back to 100% now I still keep a plan in the back of my head on every job of what I would do if I was hospitalized again in the middle of it.
Yowzah!
That and Tim Mooney's thread about his heart attack/stroke has got me to thinking about better disability insurance. Whew!
Sometimnes I feel like a gopher popping my head up just as the lawn mower blade comes whirling along.
I'd lie to see some other comment on this topic though from somebody who actually knows something, to tell us that I'm right or wrong - and why..
Excellence is its own reward!
Every time I see comments about the cost of being ill in the States I remember that there is at least one good thing about living in the UK, the National Health Service!
John
Disability insurance- you'll never never miss it till you need it ........that's about all I know. FWIW, http://www.disabilityinsuranceforums.com/