|Contractors suggest always planning ahead and having a strong cash reserve as a rainy day fund in preparation for tougher times, whether it be from the economy, insurance issues, or other potentially damaging situations.|
As many residential and commercial contractors learned during the most recent recession, having a battle plan for surviving tough times is an absolute must. For many contractors, that plan starts and ends with cash — ideally, lots of it.
Russ Donnici, president, Mechanical Air Services, San Jose, California, said he’s navigated his way through tough times by living by one simple concept: Make sure anything you get is a need, not a want.
“I’ve seen contractors buy boats or fancy cars, and those aren’t needs, they’re wants,” Donnici said. “They are never prepared for a down period. This recession we just had was the worst I’ve seen in 38 years. In our worst year, I think we had a 40 percent drop in revenue, but we were able to survive without incurring any debt just operating with our cash reserves.”
In 2008 and 2009, Donnici took the ultimate blow on behalf of his business and furloughed his salary, as he didn’t want to cut the income of his employees.
“I did that to help the cash flow of the business,” he said. “I basically lived off my investments. Most business owners can’t do that, but I believe if they operate in a conservative way, they’d probably have a better chance at it.”
Learning from Mistakes
Troy Neerings, president, Neerings Plumbing & Heating Inc., Salt Lake City, suffered through a worst-case scenario when the last recession hit. “Before the recession, I always had a line of credit, but I never used it. I built my business on cash, with the exception of some vehicles and a mortgage for the property,” Neerings said.
However, right before everything came crashing down in 2008, Neerings decided to diversify his savings. It almost cost him his business.
“I used a national bank, and placed about $250,000 in cash in a savings account, though I was advised to place it in investments,” Neerings said. “My timing was horrendous. I put it in some funds on the stock market, then a month or two later, it all crashed, and it was gone, pretty much overnight. Then I found out they secured my line of credit to the money I had in the account, so, for the first time, I needed a line of credit, and they wanted to pull it.”
With business numbers already dropping because of the recession, Neerings said a local bank extended him a line of credit that helped him make it through. He said dealing with locally based people rather than impersonal national companies was a real valuable lesson.
Department of Redundancy Department
Although he was somewhat insulated from some of the economic downturn, Rick Tullis, president, Capstone Mechanical, Waco, Texas, didn’t let that stop him from forming a plan.
With Capstone doing a lot of work in data centers, he got to thinking about how the company operates, how it plans for redundancy, and how it has constant backup units in place for emergency situations.
“Somewhere along the way, that really got me thinking about Capstone and how well we’re prepared for all the different things that could come at us,” Tullis said. “That was a big catalyst. You hear the horror stories of other small businesses that had a fire, or a roof leak, or someone ran off with all the money, or any number of potentially tragic circumstances that can hurt a business.”
With that in mind, Tullis took charge and diversified his business, keeping his employees busy through newfound pockets of profit.
“We actually grew substantially during that time. We learned how diversity can really help a company survive that type of scenario,” Tullis said. “When the market started crashing in 2008, there had been a lot of bond projects passed in our area, so for the first year or two after the crash, we had plenty of work, mainly driven by the public sector. Over time, that work started to decrease, but then federal spending started to increase, so we got opportunities there. Private market development was dropping off dramatically, except in the industrial sectors. We found a lot of those companies were sitting on cash, and they took advantage of some opportunities there to expand. We worked with several of our industrial clients as they expanded. Now, it’s come full-circle. We’re starting to see the private markets pick back up, and the federal market is going down.”
According to Neerings, service agreements are a great way to help fend off potential problems. He’s found great success in keeping that aspect of his business healthy and profitable.
His lasting thought, though, is to always be aware of your business’s performance and don’t squander precious good months.
“I have to confess, I always knew studying your financial statements was important, but in the years leading up to the recession, I didn’t really look at them, and got out of the habit of studying them. We got real fat and lazy,” Neerings said. “If I was paying attention to the key indicators on my financial statements, I would’ve been much better prepared. As I watched the train continue to drop, I would’ve responded much differently than I did. I cost myself a lot of money.”
Donnici said, after a close call in 1994 where “we came really close to the bone,” he became much more aggressive in managing the company’s cash reserves.
“That really paid off for me in this latest recession,” he added. “In 2008-2009, I could’ve used those reserves to keep paying myself, but that would’ve been like shooting myself in the foot.
“One of the main failings of contractors — and I was guilty of this to some extent — is when we start our businesses, we are very technically oriented. Because of that, we think running a business is easy. You either realize this very quickly or it’s going to hurt you. Your business acumen needs to be as great as your technical prowess. Unfortunately, people are impulsive. Impulsivity will kill you. I’ve seen it over and over. It’s really unfortunate.”
Publication date: 9/1/2014