Siegal: A Wake-Up Call for Contractors
authors Scott Siegal | April 14, 2021
A lot of people in our industry were blindsided when the COVID-19 pandemic shutdown happened early last year. Suddenly there were no sales; and without sales, there was no money coming in, either from deposits or from collections on finished jobs. The revenue spigot shut off. How would business owners pay bills or staff? How long would it go on?
Fortunately, the government stepped in with the Payroll Protection Program (PPP) that helped millions of small businesses sustain their operations. But payroll is only one part of overhead. All of those other expenses remained. The problem for owners afraid they might not be able to meet the financial obligations of their companies is always a simple one: There’s not enough cash.
60 Days of Uncertainty
I learned a long time ago that the one mistake you can’t overcome in any business is not having enough cash. You can overcome a bad hire or screwing up a roof, or even ordering windows in the wrong size. Cash shortfall? You’re out of luck. So, if you don’t have a lot—or any—and you’re not sure when you’re going to be allowed to re-open, that can cause panic.
Many contractors did not have the cash and resorted to radical cuts. What do you do when there’s a threat to your business of this magnitude, and you’re short of operating funds? You tighten your belt. You go through the financials and figure out what’s essential and what isn’t. You look at personnel. And you channel your energy, attention and time, as the owner, into whichever part of that business most demands it.
Fortunately, in construction we were lucky. In most states, ours was an essential business, and most of us were able to keep the operation running or quickly start back up after a month or two.
How Much You Need
One lesson was the need for cash reserves to offset the sudden and sustained plunge in sales. This is why understanding your numbers is so important. Many contractors know what it costs to install a square of roofing or siding.
They know their direct costs but frequently lose sight of their overhead expense—the costs that are there every month whether you install a job or not. Knowing that number is key to setting up a system of cash reserves that will sustain your business when liabilities suddenly outweigh assets.
My rule of thumb is to have anywhere from 6 to 12 months of overhead expense banked. Knowing it’s there gives me the peace of mind to be able to make decisions rationally, rather than emotionally. It also gives me flexibility and options. It’s like having a big stack in poker, where you’ve got the leeway to take advantage of opportunities.
Building that cash reserve means simply putting the money away. Sometimes doing that requires discipline. Say you’ve got an extra $100,000 this month. You could buy a new truck, take the money as salary or give a bonus to employees. Why not put some percentage of it, or all of it, aside for future use?
Building reserves can also be a matter of committing a certain percentage of net profit to savings each and every month. How big you want that reserve to be depends on how risk-averse you are.
Thinking Long Term
Cash flow is critical to all of this because to grow capital, you have to balance revenue against operational expense. Most contractors look at their profit-and-loss (P&L) statements and other reports at least monthly. What’s more important in getting your company to the place you want to take it is getting that cash flow to correlate with the overall plan you have for your business. That’s particularly critical because for many of us, this is a seasonal business.
For instance, my company, Maggio Roofing in the Washington, D.C., area, typically takes a hit in February. You can’t install a roof when it’s raining or if there’s snow on it. Our sales drop, but they ratchet back up in April and May. Our plan anticipates lower February sales based on history. If they’re way off, we may need to take some kind of action.
Healthy cash flow and maintaining sufficient cash reserves are two parts of a whole. What I see when it comes to cash reserves, though, is that most companies don’t have more than a month or two of cash to ride them through a threat such as the COVID-19 pandemic shutdowns.
Of course, no one ever thought we’d get shut down like that; but it happened, and what’s positive about it is that it showed companies where they are vulnerable and where they need to take action. It was a wake-up call for contractors.
In construction we got lucky. Unlike the hospitality industry, which was completely shut down, we were considered essential. It could easily have gone the other way. What if you were closed for six months or eight months, instead of one or two? Would you have the resources to sustain the business? Because, if nothing else, last year demonstrated that anything is possible. QR
Scott Siegal is the owner of Maggio Roofing in Washington, D.C., and also owns the Certified Contractors Network. You can learn more about CCN by going to the website contractors.net.