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CONTRACTOR’S CORNER

BY DAVE YATES

Business insulation

Cash is king in business.

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Supply chain disruptions are ever present and show no signs of going away anytime in the near — or perhaps distant — future. One of the biggest challenges I hear from mechanical contractors is rapidly changing prices that are eating up profits after being awarded bids, and before the goods required are purchased. That, and the scarcity of things such as water heaters and HVAC equipment. Wouldn’t it be nice to have the ability to buy those products well in advance of needing products on a job site?

I started my own mechanical contracting business in September 1979, in the deep depths of a recession. In order to survive, I needed to insulate my business from all potential business killers: Customers not paying on time, or maybe not at all without a legal fight; general contractors who are notorious for delayed payments or who go bankrupt; commercial customers who often drag out payments for 90 to 180 days; ensure the supply house bills were always paid on time to obtain the discounts; and last but certainly not least, ensuring payroll was met without fail.

My target goal was to build cash reserves equal to 8% to 15% of my annual supply house purchases. Maintaining a line of credit is a smart move in case you need to borrow to make ends meet, and establishing credit is always sound reasoning. Taking out a loan from your line of credit when you don’t need the money and paying it back early will give you a solid footing with your banker. Just remember this: Loans charge interest, which costs you money. With a cash reserve, you can coast through the lean times and earn interest on your money. There are options for parking cash reserves that your trusted banker or financial adviser will help you establish. Bear in mind there needs to be liquidity in those assets so you can pull out cash if needed.

Always ask your supplier to lock in pricing so that you are protected for bid work. If they can’t, or won’t, for all but a brief timeframe, then you need to include similar time limits on your bids.

Payroll is your top financial priority — period. Miss a payroll and you will lose the trust your employees placed in you. Once that happens, you have burned that bridge and will likely lose employees. Federal withholding payroll tax must be submitted on time, every time, too. I know one guy who opened his own mechanical contracting firm and never submitted the federal withholding taxes for his employees. It takes the IRS a few years to catch those who fail to submit withholding taxes, but when they did catch that guy, his fine equaled the amount of withholding he had kept for himself. He also stole the employees’ so-called retirement funds. Start-to-finish (bankruptcy) in three years’ time. Bankruptcy doesn’t provide a get-out-of-jail-free card where debt to the IRS is concerned.

Do you lease or purchase vehicles? Leasing means monthly payments that never go away and you build no equity. Lease contracts often include a cap on the maximum miles you can drive before paying mileage penalties. On the other hand, purchasing your vehicles has definite tax advantages, including depreciation, which helps to lower your business tax burden. Having cash reserves allows you to either purchase outright or finance some portion of the new company vehicle. Your accountant should be consulted to determine what works best for you and your long-term goals.

Cash is king! With today’s uncertain prices for goods, you can purchase in advance of the need for that project you bid and were awarded. Always ask your supplier to lock in pricing so that you are protected for bid work. If they can’t, or won’t, for all but a brief timeframe, then you need to include similar time limits on your bids with a clause that allows you to raise prices if your costs go up before being awarded the job. If the client won’t accept the terms, you are gambling on taking a hit to your potential profits or you can walk away. I was always hesitant to build in cost increases if our costs went up because that meant revealing our cost for goods and then justifying markups that folks always seemed to feel you aren’t entitled to.

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Case in point: When we were awarded large commercial bids, I was able to purchase all fixtures, piping, and/or HVAC equipment at the locked-in pricing we had obtained from our supplier(s). One was for a hotel renovation where we replaced 140 bathrooms and purchased everything before costs could go up. The supply house warehoused everything so we could stage deliveries as needed.

If a client thinks they can coerce you into lowering your final billing because they think you need the cash to meet your obligations, that cash reserve puts you in the driver’s seat. That was the agreed upon price and we’re sticking to it. “You can either take what I’m willing to give you or take me to court!” It didn’t matter to them that we had a signed contract; they assumed they could bully me by thinking — incorrectly — that I needed the money in order to keep my business afloat. Wrong.

When the phones stopped ringing after 9/11, no one went without a paycheck, and we were able to get a ton of put-off maintenance done in the shop, build some hydronic panels, have classes on much-needed training and better organize our inventory (including the fleet of trucks) that helped streamline our operations once business returned to normal.

Your cash reserve is part of your exit strategy, too. One day you will want to sell your business. Trust me on this: That day comes at you faster than you might anticipate! In addition to the purchase price for your business, the new owner(s) can either roll some, or all, of the cash reserves into their business loan so they have immediate operating capital, or you get to take the cash with you when you walk out the door. Either way, you get to keep whatever the IRS doesn’t take. Smart money is on having a pow-wow with your financial advisor and/or accountant to make that cash reserve work for you.

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Dave Yates began his career in the PHCP-PVF trades in 1972 with F. W. Behler, a third-generation plumbing/HVAC firm he purchased in 1985. He can be reached at dyates@fwbehler.com.