Barter as a form of credit
All businesses need credit from time to time. If you are lucky enough to be in the USA you have many credit choices to pick from, credit cards, small business loans, factoring your receivables, etc. If you're located in a Third World country there are no loans available to businesses. The available capital is what determines your success. You can not make it without capital.
When you shop for credit you look for the lowest cost, ease of obtaining the credit and how fast you get it. Sometimes you will pay a higher interest rate if you can get the credit fast enough. What is most important is deciding if you can make money with the borrowed money.
Barter Exchanges offer credit lines just like a bank. In countries where there are no business loans if it wasn't for trade exchanges there would be no way to do business. Most trade exchanges do not charge interest and they can approve your credit line with a phone call Barter Exchanges understand that credit creates momentum in the economy.
The next time you need extra cash in your business account call a trade broker and compare our cost of credit with all other types of credit. The added benefit a trade broker will provide is they will help you pay back the loan by selling your products or services. Unlike a bank that only loans money.
www.barternow.us Thank you
Wednesday, October 29, 2008
Tuesday, October 28, 2008
Monday, October 27, 2008
Cash Management for Construction Companies
by Tiffany Wright
Cash management in this economic environment is crucial. Cash is the life-blood of any business. As the saying goes, “Cash is king”. With so many banks tightening credit standards due to what’s happening in the credit markets or within their own lending portfolios, it is crucial that businesses fully understand their cash needs IN ADVANCE and make adjustments to their operations to ensure that cash is available. Otherwise, companies may find themselves in a liquidity crisis –unable to meet payroll, pay suppliers, or pay subcontractors - which leads to bankruptcy or an operational shutdown.
Cash is NOT income. Let’s assume you enter into a $200,000 contract to provide interior fit-out services which will take you ~30 days to complete. According to the contract you submit invoices once per month (fairly standard in commercial construction) on the 25th and the general contractor has 30 days to pay you. You commence work on October 1. Before you begin, you buy materials such as drywall, nails and other supplies. You pay your tradespeople and foremen every 2 weeks so a check for their work is due on October 14. You buy materials and supplies for the last phase of work. You submit your invoice for $160,000 for work completed by the 25th, as per the contract. You pay your tradespeople again on Oct. 28. Assuming you have properly estimated the job and had no cost overruns, you have already spent IN CASH $140,000 - $160,000 on materials and supplies, equipment or equipment rental, personnel and miscellaneous.
Now you must wait until November 25 to receive payment. However, you only billed for 80% of the project, so you will only receive $160,000 maximum. You completed the job and bill for the remaining 20% or $40,000 by November 25th which you will receive by December 25. That assumes there is no retainage. With government contracts or bonded contracts that retainage is typically 10% or $20,000 in this example. If your contract calls for retainage, then you may have to wait several months before you receive the final $20,000.
So you spent $140,000 - $160,000 of your money in October: perhaps $30,000 the 1st week, $55,000 the 2nd week, $20,000 the 3rd week, and $55,000 the 4th and final week. You do not receive payment until November 25. You have a cumulative negative cash flow from this job of -$30,000 the 1st week, -$85,000 the end of the 2nd week, -$105,000 the end of the 3rd week, and -$160,000 the end of the 4th week. This negative cash flow or cash flow shortfall continues for four more weeks until you receive your first check of $160,000 for the project at the end of the 8th week. Upon payment your cash shortfall goes to 0. However, if you had a 10% retainage, you’d only receive a check for $144,000 and you’d still have a negative cash flow on the project of -$16,000. A little over four more weeks later you’d receive the second and last payment of $40,000 (again, assuming no retainage).
Yes, on this job you have a 20-30% operating profit. This looks great on paper. However, you also have negative cash flow for as long as 12-13 weeks or as little as 8 weeks and you are likely struggling financially trying to come up with cash to pay your people and your suppliers. We have all heard of subcontractors who went bust during a job and another one had to come in and take over. This unplanned cash flow shortage is the primary reason construction companies go out of business. If you do not have overlapping jobs with payments coming in that can cover the cash flow shortage, your business is hurting. You must engage in this type of budget planning and analysis before each and every job in order to plan your cash needs accordingly.
One way to mitigate the cash outflows is to get terms from your suppliers on your materials and supplies. If you can get 30-45 day terms, you can reduce both the amount of the negative cash flow and the length of time cash flow is negative. Another way is to use subcontractors instead of trade personnel and subject them to the same payment terms you are under with the contractor. Thus, instead of paying tradespeople every 2 weeks, you pay the subcontractor within 30 days of the submission of the invoice. In both these instances you align your cash outflows with your cash inflows as a way of negating or minimizing negative cash flow.
Of course, many subcontracts stipulate that a certain percentage of the work must be completed by your company which thereby places a defacto limit on the amount of work you can subcontract. In addition, quality and safety are often a concern when you utilize a high number of sub-subcontractors whose performance and sourcing you cannot directly control. Shoddy work leads to missed completion dates and additional expenditures tied to correcting mistakes. Consequently, over-dependence on sub-subcontractors can lead to cash flow shortages and other operational issues. This is yet another reason for the demise of some subcontractors while carrying out a contract.
A line of credit can help you weather cash shortages by leveraging working capital. Working capital is short-term assets – short-term liabilities or typically cash + account receivables – account payables – payroll payables. You can use your line of credit to pay payroll, rent equipment, or purchase supplies when you cannot get terms. If you do not have a line of credit with a bank, pursue one. Cultivate a strong relationship with a banker at Vice President (or equivalent) level and above. In these economic times with the credit market roiling and many banks dealing with issues in their own lending portfolios, strong relationships play an even larger role in obtaining credit than a year ago.
You can also pursue a line of credit with an accounts receivable financing or factoring firm. These charge much higher rates than banks but often are a good source of capital if you are growing significantly or garner a much larger contract than is typical for your company. Banks use your company’s three-year historical performance to provide credit lines so large increases in revenue over a short period often do not translate into a credit line increase for a few quarters. A receivables financing firm will provide a line based on your historical financials and the credit-worthiness of your customer. Unfortunately, since construction contracts and the attendant receivables often have the retainage provision, many receivables financing firms do not provide credit lines to construction companies. When they do, it is often at higher interest rates to compensate for the higher risk. Rates can be as high as 4-6% per month – assuming a 30-day payoff on the receivable – which is 48-60% per year!!! Sometimes you have to take what you can get but do so only for very short periods with a plan of action to obtain other financing at much better terms within the next 4-6 months.
To summarize, cash is king always but definitely in restricted capital environments. Money is still available but it takes longer and requires more creativity and perseverance to access it. Therefore, plan your cash needs and budget your cash resources as much as possible. Know your daily spend rate, be able to quickly determine how much cash you have on hand at any given time, know your expected operating cash flows and the timing of those cash flows. If you do not, you are headed for trouble. Or you may already be troubled –stressed out, continually seeking money from somewhere, continually trying to increase revenue even though you lose money with each sale. Stop, determine your cash outflows and inflows on a per project basis, and make decisions based on that information. In this market, you may have to jettison slow-paying, high complaint customers. When cash is king, these customers drag down your bottom line.
All rights reserved.© Tiffany Wright is President of Toca Family Business Services, a strategic advisory firm that provides interim CEO and CFO services, and the publisher of Equal Construction Record. She is the author of Solving the Financial Equation: Financing Solutions for Small Businesses, available at Amazon.com or www.tocafamilypublishing.com. Please contact her at twright@equalconstruction.com.
Cash management in this economic environment is crucial. Cash is the life-blood of any business. As the saying goes, “Cash is king”. With so many banks tightening credit standards due to what’s happening in the credit markets or within their own lending portfolios, it is crucial that businesses fully understand their cash needs IN ADVANCE and make adjustments to their operations to ensure that cash is available. Otherwise, companies may find themselves in a liquidity crisis –unable to meet payroll, pay suppliers, or pay subcontractors - which leads to bankruptcy or an operational shutdown.
Cash is NOT income. Let’s assume you enter into a $200,000 contract to provide interior fit-out services which will take you ~30 days to complete. According to the contract you submit invoices once per month (fairly standard in commercial construction) on the 25th and the general contractor has 30 days to pay you. You commence work on October 1. Before you begin, you buy materials such as drywall, nails and other supplies. You pay your tradespeople and foremen every 2 weeks so a check for their work is due on October 14. You buy materials and supplies for the last phase of work. You submit your invoice for $160,000 for work completed by the 25th, as per the contract. You pay your tradespeople again on Oct. 28. Assuming you have properly estimated the job and had no cost overruns, you have already spent IN CASH $140,000 - $160,000 on materials and supplies, equipment or equipment rental, personnel and miscellaneous.
Now you must wait until November 25 to receive payment. However, you only billed for 80% of the project, so you will only receive $160,000 maximum. You completed the job and bill for the remaining 20% or $40,000 by November 25th which you will receive by December 25. That assumes there is no retainage. With government contracts or bonded contracts that retainage is typically 10% or $20,000 in this example. If your contract calls for retainage, then you may have to wait several months before you receive the final $20,000.
So you spent $140,000 - $160,000 of your money in October: perhaps $30,000 the 1st week, $55,000 the 2nd week, $20,000 the 3rd week, and $55,000 the 4th and final week. You do not receive payment until November 25. You have a cumulative negative cash flow from this job of -$30,000 the 1st week, -$85,000 the end of the 2nd week, -$105,000 the end of the 3rd week, and -$160,000 the end of the 4th week. This negative cash flow or cash flow shortfall continues for four more weeks until you receive your first check of $160,000 for the project at the end of the 8th week. Upon payment your cash shortfall goes to 0. However, if you had a 10% retainage, you’d only receive a check for $144,000 and you’d still have a negative cash flow on the project of -$16,000. A little over four more weeks later you’d receive the second and last payment of $40,000 (again, assuming no retainage).
Yes, on this job you have a 20-30% operating profit. This looks great on paper. However, you also have negative cash flow for as long as 12-13 weeks or as little as 8 weeks and you are likely struggling financially trying to come up with cash to pay your people and your suppliers. We have all heard of subcontractors who went bust during a job and another one had to come in and take over. This unplanned cash flow shortage is the primary reason construction companies go out of business. If you do not have overlapping jobs with payments coming in that can cover the cash flow shortage, your business is hurting. You must engage in this type of budget planning and analysis before each and every job in order to plan your cash needs accordingly.
One way to mitigate the cash outflows is to get terms from your suppliers on your materials and supplies. If you can get 30-45 day terms, you can reduce both the amount of the negative cash flow and the length of time cash flow is negative. Another way is to use subcontractors instead of trade personnel and subject them to the same payment terms you are under with the contractor. Thus, instead of paying tradespeople every 2 weeks, you pay the subcontractor within 30 days of the submission of the invoice. In both these instances you align your cash outflows with your cash inflows as a way of negating or minimizing negative cash flow.
Of course, many subcontracts stipulate that a certain percentage of the work must be completed by your company which thereby places a defacto limit on the amount of work you can subcontract. In addition, quality and safety are often a concern when you utilize a high number of sub-subcontractors whose performance and sourcing you cannot directly control. Shoddy work leads to missed completion dates and additional expenditures tied to correcting mistakes. Consequently, over-dependence on sub-subcontractors can lead to cash flow shortages and other operational issues. This is yet another reason for the demise of some subcontractors while carrying out a contract.
A line of credit can help you weather cash shortages by leveraging working capital. Working capital is short-term assets – short-term liabilities or typically cash + account receivables – account payables – payroll payables. You can use your line of credit to pay payroll, rent equipment, or purchase supplies when you cannot get terms. If you do not have a line of credit with a bank, pursue one. Cultivate a strong relationship with a banker at Vice President (or equivalent) level and above. In these economic times with the credit market roiling and many banks dealing with issues in their own lending portfolios, strong relationships play an even larger role in obtaining credit than a year ago.
You can also pursue a line of credit with an accounts receivable financing or factoring firm. These charge much higher rates than banks but often are a good source of capital if you are growing significantly or garner a much larger contract than is typical for your company. Banks use your company’s three-year historical performance to provide credit lines so large increases in revenue over a short period often do not translate into a credit line increase for a few quarters. A receivables financing firm will provide a line based on your historical financials and the credit-worthiness of your customer. Unfortunately, since construction contracts and the attendant receivables often have the retainage provision, many receivables financing firms do not provide credit lines to construction companies. When they do, it is often at higher interest rates to compensate for the higher risk. Rates can be as high as 4-6% per month – assuming a 30-day payoff on the receivable – which is 48-60% per year!!! Sometimes you have to take what you can get but do so only for very short periods with a plan of action to obtain other financing at much better terms within the next 4-6 months.
To summarize, cash is king always but definitely in restricted capital environments. Money is still available but it takes longer and requires more creativity and perseverance to access it. Therefore, plan your cash needs and budget your cash resources as much as possible. Know your daily spend rate, be able to quickly determine how much cash you have on hand at any given time, know your expected operating cash flows and the timing of those cash flows. If you do not, you are headed for trouble. Or you may already be troubled –stressed out, continually seeking money from somewhere, continually trying to increase revenue even though you lose money with each sale. Stop, determine your cash outflows and inflows on a per project basis, and make decisions based on that information. In this market, you may have to jettison slow-paying, high complaint customers. When cash is king, these customers drag down your bottom line.
All rights reserved.© Tiffany Wright is President of Toca Family Business Services, a strategic advisory firm that provides interim CEO and CFO services, and the publisher of Equal Construction Record. She is the author of Solving the Financial Equation: Financing Solutions for Small Businesses, available at Amazon.com or www.tocafamilypublishing.com. Please contact her at twright@equalconstruction.com.
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