Construction and Contracting Business. Entrepreneur magazine
a handheld sod remover when preparing plant beds; on one of his first jobs, he and a worker spent the better part of two days removing sod by hand. The result was not only sore arms and tendonitis in his wrists but a lower profit due to the time it took to do the task. The next week he purchased a gas-powered sod cutter for several thousand dollars, a very large expense for the young company. But the time savings he achieved by using newer and better technology allowed him to pay for the sod cutter in a single season. Instead of spending two days removing sod, he was able to complete the same work in a few hours, with less manpower as well. In fact, his sales and profits actually increased because he was able to move on to the next job much more quickly.
Contactors often work together to finish projects. Their working relationship may not be formal as they might merely be working on a project at the same time. However, many contractor jobs overlap. Contractors have to understand what the others are doing so that they do not “step on each other’s toes.” All of them should be able to read and understand blueprints of the building and the landscaping so that the materials they are installing do not interfere or conflict with what the other contractor is doing. For example, the irrigation contractor must be able to read the landscape plan and the grading plan in order to efficiently design the sprinkler system; the low-voltage outdoor lighting specialist must understand the electrical plans in order to design a lighting plan that reduces voltage drop and does not conflict with the full-voltage lights specified for the home.
A development project comes together more successfully when all the participants understand each other’s responsibilities and what the scope of their work includes. While they do not necessarily need to know how to do the work of the other contractors, they must understand the concepts and terminology used by them.
President Thomas Jefferson once wrote, “Never spend your money before you have it.” This little truism has wide implications for the contracting industry because of the seasonal and cyclical nature of the business. In Chapter 6 we discuss how to establish a budget and the importance of cash flow. But first there are two important issues relating to money that everyone contemplating starting up his or her own business should understand.
A Nest Egg
Conventional wisdom states that a new business owner should have savings in the bank to cover at least six months of personal expenses. Every potential business owner must take the time to learn how much money he or she has spent over the past 12 months and estimate total expenses for the next six months. The attitude should be “since I will be working without a guaranteed income stream, how will I survive for at least the next six months?” Use your checkbook, bank statement, or credit/debit card statements to compile a list of all your projected expenses—mortgage, taxes, utilities, insurance, food, and recreation. If your spouse has a secure job, his or her take-home pay can be used to reduce the amount of savings you need. If you do not have the ready cash to survive at least six months, you would be wise to postpone starting your business until you have the necessary funds.
These savings should be kept separately from your stock and bonds portfolio and invested in a conservative, high-yield money market account that offers free checking and has few, if any, fees. A couple of sources for information are www.bankrate.com and the online Money magazine at http://time.com/money. Many other financial magazines also include up-to-date interest rate information on a weekly basis. The goal, however, is safety and low-risk security for yourself and your family.
Startup Funds
Beyond providing a nest egg for personal living, any new business also needs enough capital to survive six months to one year of business. Because it usually takes some time for a new enterprise to attract enough business to ensure a secure cash flow, having enough ready cash is critical. Operating expenses include salaries, wages, rent, utilities, supplies, advertising, and perhaps bank and interest payments. Sources of these funds are usually loans from banks or individuals and accumulated personal savings or loans against your life insurance policy if you have one. You do not want to put your home at risk with a home equity loan nor do you want to run up high-interest credit card debt or dip into money in your retirement portfolio, which you’ll need for your future.
A Good Credit Rating
The financial demands on a new contracting company can be enormous. Not only do employees expect to receive their wages every week or two, suppliers expect to be paid every month, possibly even within ten days. Clients, on the other hand, often do not see an urgency to pay immediately upon completion of the work. Some clients seem to think that contractors are banks and that they can pay off their invoice over several months. This situation should be avoided by requesting a down payment from a client before the work begins. However, a key ingredient to success is earning a good credit rating so that your suppliers will send you a bill once a month for the items you purchased. A good credit rating will also allow you to purchase vehicles and equipment and borrow the funds from your bank.
The problem with buying materials on credit is the ability to pay in a timely manner without incurring late and/or finance charges. While credit is a good way to maintain current cash flow, it is not a substitute for having available funding. A rule of thumb is to use debt by intention and not by default. In other words, have the money available and do not buy on credit (or hire people on credit) with hopes that the money will show up. Chapter 6 delves into the subject of managing your cash flow in much more detail. Remember, a good credit rating will allow you to establish charge accounts at your suppliers, but only by paying the suppliers according to their requirements will you maintain your good credit rating.
tip
Get to know your banker! It is not enough just to swing by the bank and make deposits; you should get to know a personal banker at the branch where you do your banking. Over time, she will understand your business and your financial needs. She’ll be in a good position to advise you about interest rates, borrowing, and how to best manage your cash.
There are three companies in the United States that maintain credit information on individuals: Equifax, Experian, and TransUnion LLC. Contact information on these companies may be found in the Appendix. It is a good idea to check your credit rating from time to time to ensure that there are no errors in the report.
An important piece of the puzzle needed to answer the question “Do you have what it takes?” is the ability to manage the enterprise. You have seen that contractors must be able to manage their own time, be disciplined, and be self-reliant. However, they must also be able to manage the activities and turmoil that usually surround them on a daily basis. A workplace is a dynamic community of people with varying backgrounds. While it is true that a company is much like a family, it is also an individual business. Often business decisions conflict with personal feelings; good managers must be able to separate emotion from hard reality.
Managing People
Managing people is a true art. People have their own personalities that are sometimes in conflict with one another. However, because they work for the same organization, they must be able to work together for a common goal. As a contractor-owner it is up to you to promote a work environment in which people focus at the task at hand and keep their personal opinions on outside matters, especially politics and religion, to themselves.
You have heard about the sports team whose talent is not highly regarded; however, its coach has the ability to push each player and enable them to perform at a level above their natural talents. He’s able to generate