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How to Survive Till Next Week: One Builder’s Perspective
By Randy Noel, Reve, Inc.
When you’re in survival mode, you have to make hard decisions.
It’s easy to keep cash flowing and your business running when times are good, but what about during a downturn when cash is low and credit is hard to come by?
How do you decide who to pay and how much to pay them?
Be Extra Careful With the Cash on Hand
When cash is short, builders have to be careful and judicious with the cash they have on hand. This means, not only saving where they can, but also making some payments and renegotiating others so they don’t send out signals of dire distress.
Here are a few judicious guidelines on how to keep the cash flowing:
- Builder’s salary: This, of course, is what the builder pays himself. Keep your salary as low as possible, but make sure you can sustain your household. This may seem selfish, but a builder must protect his personal assets to remain in business. If you lose those assets, what will motivate you to stay in business?
- Business staff’s salaries: By this time, most of your staff members are gone and only your essential employees are still working for you. They should be doing as much work as possible and helping to keep you in business. Keep paying them, because if you stop, they will leave as quickly as possible. They, too, have bills to pay and cannot miss their payments.
- Business rent, phones, etc.: You should reduce these expenses as much as possible, but don’t trim too much. As soon as a builder closes his office or disconnects his phone, red flags go up in the building community — and material and labor gets that much harder to find.
- Small subcontractors paid weekly: Like your employees, these smaller businesses cannot afford to miss a week’s payment. They typically are lower in price than your larger subs, so you should have funds to pay them. They also oftentimes are the most vocal people on your job site, so you really cannot afford to slight them.
- Small suppliers paid monthly: Like your smaller subcontractors, local suppliers who have investments in inventory and offices and cannot wait for payment. They will cut a builder off quickly and leave him without necessary materials to complete the job because they have little room or tolerance for delayed or non-payments.
- Large subcontractors paid monthly: Larger subcontractors — typically, your plumbers, HVAC and electricians — are more likely to have reserves that will give you a little cushion. You should be able to work with them a little, provided you let them know ahead of time and you don’t push payments beyond the lien period.
- Large suppliers paid monthly: These are usually national suppliers. They probably have reserves and also may be able to stretch terms a bit, but like your larger subcontractors, they won’t want to stretch beyond the lien period.
- Property taxes on inventory: States will seize your inventory if you don’t pay property taxes on your unsold homes. It probably will take your state some time, and most states allow redemption, although you will have to pay penalties and interest. This is not a path you should choose to take, and be sure to talk to your legal counsel.
- Community and Home Owner Association Fees: Like property taxes, non-payment of these fees can be made up at the homes sale — with penalties and interest — and seizing property is a long process.
- Maintenance on your inventory: Appearance matters. You need to continue to cut the grass, pay the utilities, keep the homes clean and do all the other necessary maintenance in order to keep appearances up and sell your inventory. You will probably have a little wiggle room. Paying your staff members should come first.
- Interest on inventory: Lenders collect monthly interest on loans and do not begin to work out forbearance until a builder is behind on his interest payments. Most loans have equity positions at 80% on loans, thus placing the lender in a favorable position in the inventory.
Having worked on the back end of a failed company myself, the order above is the order I chose to follow when paying because I saw it as the most moral solution available.
How you pay will vary depending upon your circumstances. If your situation is dire, you could find yourself with no choice but to put out the largest fires as quickly as you can.
When paying your bills, however, your immediate goal should be to appear as normal as possible. As soon as the community believes a builder is in trouble, rumors begin and labor and suppliers intensify their collections or refuse to work or ship. And when that happens, the builder is finished.
Tips on How to Slow the Cash Flowing From Your Business
In addition to determining who to pay and when, you also can limit or slow the flow of cash from your business. Here are a few tips:
First, seek extended terms with your major suppliers. They may allow 45-day terms, but rarely will go past your state’s lien period provision, if such a provision exists.
Next, when signing personal guarantees, limit them to one year. This will require the supplier to seek a renewal every year and enable you to keep on top of the amount of personal guarantees in his market.
Be sure to always sign every delivery, purchase agreement, listing agreement, tax report and other documents as the corporation or as its employee so that you aren’t personally liable for anything.
Also, stop handing out checks at the office and either deliver them to the job site or mail them. Once you’ve established this policy, put every invoice on a week-from-invoice-to-payment schedule. This will give you more time to evaluate your invoices and slow the flow of cash out your door.
Never pay for incomplete work. Now is not the time to extend credit to subcontractors. Try to negotiate prices before they begin their work. They are hurting, too, and they may try to make up for lost work by raising their prices.
Never write checks without the money in the bank. Bounced checks are like a cancer to a home builder. They lead to rumors, and once the rumors begin, you can begin to lose credit with your lender — and a death spiral begins.
You will be much better off if you do not issue a check for incomplete or substandard work than to release a check and have it bounce.
Finally, look at the list above again and prioritize who should get paid first.
When I did this for my father’s company, I always paid starting with those who were least able to withstand the financial crunch and ending with those who were likely to withstand it.
Above all, run your business like a business and continue to remember that it is a business. When you do, everyone else will believe it, too.
Randy Noel, president of Reve, Inc., is a custom home builder in the New Orleans area. He is also a member of the NAHB Business Management and Information Technology Committee.
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