What is Best for You? Options for small construction companies and other similar business service providers

By Tiffany Wright

There are myriad sources that construction companies can access when seeking funds to grow the business whether that is to broaden the geographical area, expand the array of services, or pursue significantly larger contracts. (Acquisition financing is not covered here.) I have covered many of these sources in previous articles. However, the question sometimes is, “What options should I pursue and in what order?” For construction companies, the answer lies below.

Follow these steps to procure financing to grow your business

1. Personal finances.

2. Friends and family

3. Banks. Typically a line of credit is what you’ll need for your working capital needs. If you are purchasing equipment, materials, and other assets, consider financing from the seller (distributor, equipment leasing vendor, or other supplier) and credit cards. For all other working capital needs – payroll and other payments in advance of payment from customers – the line of credit should suffice.

4. Credit cards. Refer to the bank discussion. Use credit cards to purchase office supplies and other materials.

5. Accounts receivable financing or factoring. If you have contracts or purchase orders or proposals from which you create invoices, and hence receivables, then accounts receivable financing may work well for you. As mentioned in previous articles, this can be expensive but is often a great short-term solution. Some receivable financing and factoring firms do not finance construction projects due to the reserves/retainers often contractually required.

If you are working on specific government contracts or with a specific government sub-agency, there may be dollars set aside to provide lower interest loans tied to the receivables from the contract. Ask. Investigate.

6. Microloans. If the amount of money you need is low (under $25,000) consider microloans. There are a number of microloan providers in the Atlanta metro area and throughout the state of Georgia.

7. Angel investors. If you have a rapidly expanding business or have a plan for one, an angel may provide the equity funds you need to grow your business.  An angel that is actively involved in the business may also serve as a guarantor for a bank line of credit if your personal credit or your business credit rating is too low to qualify for a loan.

8. Joint venture.

9. Strategic investment.

10. Private equity. Business service providers such as construction companies, IT services companies, marketing firms, and business consulting providers (the list goes on) can only attract equity if and when they have a plan to expand regionally or nationally, occupy a strong market niche or have successfully differentiated their company from their competitors.

Private equity funds typically need a 20% or greater expected return and without the larger expansion plans and scope, a construction firm or other business services company will not provide the required returns. You cannot attract equity for your ten-person firm. However, if you have the management team, business development acumen, sales strategy, and operational foundation to grow the business to a 100-person or larger enterprise in a few years, private equity funds may be interested.

Construction firms tend to be small, local operations. Therefore, most firms will not qualify for any equity investment. However, if you want to make the leap from a small consulting type shop with historical revenue of $3 Million or less to one with $30 Million or more, you need to first create the vision and goals, then the plan to achieve those goals . If necessary, engage business consultants and coaches who can help you identify the company’s and your weak areas and put the things in place that will lay the foundation to help you achieve your goals.

If you only reached $3 Million in all of the last ten years, and now you want to make the jump to $30 Million in five years, you must address the huge credibility gap you are now burdened with. Utilizing consultants and coaches will get you there sooner.  These entities can also help you write a plan that incorporates the necessary changes.

If you have been on the path to larger revenue from the beginning, then you do not have the credibility gap with an equity source. However, you must clearly understand and clearly communicate how you are different and how you will achieve revenues of tens of millions when the vast majority of your peers will never come close. This is not to discourage you but to simply help you understand what the investors’ point of view will be.

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.

Bonding and Finance - for Construction Companies

Bonding and Finance

By Tiffany Wright

This month, the finance article will take a different perspective. We will focus on bonding and how it affects financing. Next month we will discuss the impact of bonding and its requirements on an acquisition.

Bonding is NOT insurance. The purpose of bonding is to ensure that the project continues on or near schedule despite issues with performance or payment. The bond is there to provide assurance to the owner or general contractor that your company can and will fulfill its obligations as contracted. In the event that the bond is utilized, the bonding company expects full repayment for the amount utilized.

Bond companies need 10% equity (or higher) on the balance sheet. In order to show this, a company must retain a portion of its earnings each year. This retention is shown in the Stockholder’s Equity section of the balance sheet. If your firm has not previously retained earnings due to past losses or large shareholder distributions, one way to shore up the balance sheet is to inject your company with equity capital. This injection will show under Contributed Capital in this section. If you’ve made a Shareholder’s Loan to the company, you can quickly shore up your balance sheet by converting that loan to equity. Check with your accountant and attorney to make sure you document the conversion properly.

Bond companies also like to see 5-10% of the revenues in a line of credit (LOC) for a program. That way if you encounter a hiccup – cost overruns, slow payment by the owner or general contractor, disputed work – the surety can be assured that you have access to funding above and beyond your operational cash flow. This LOC will help you complete the work as contracted, thus reducing the risk that any use of the bond will be necessary.

It can get a little tricky here. Banks and other financial institutions will not provide an LOC against “bonded receivables”. Bonded receivables are those accounts receivables that are generated from contracts that required bonds. Why won’t banks lend against these? Because banks place liens on accounts receivables as collateral for the LOC and in doing so mandate that they are in the first position to obtain these receivables in the event of a default. However, with “bonded receivables” the bond company is in the first position. How do construction companies get around this? Most companies do not have 100% bonded contracts so those non-bonded receivables make good collateral. In addition, companies may utilize equipment, property, or other collateral or strong personal guarantees by its management to obtain or increase its LOC.

Many of you understand what a “bonding program” is but some don’t fully understand precisely how it works. Following are two examples to best illustrate what bonding agents mean when they discuss a “program”.

Example 1: Company A has $12 million in annual sales and that revenue is generated from two large $6 million projects. Project 1 yields $6 million for the January – June period and Project 2 yields $6 million for the July – December period.  Assuming that both jobs/projects are fully bonded, this equates to a $6 million bond program. (This $6 million is the per project maximum bonding capacity.)

Example 2: Company B also makes $12 million in annual sales. However, that revenue is generated from a number of small jobs with an average size of $150,000 - $300,000. In any given month projects are beginning and ending, with the overwhelming majority of jobs lasting only 3-4 weeks. The average monthly revenue from these jobs is $1 million. Assuming all jobs are fully bonded, this equates to a $1 million bond program. (This $1 million is the per project maximum bonding capacity.)

A complete program is typically denoted as “per project maximum” over “aggregate bonding” program. I.e., a “2 over 4 program” would be as follows: per project maximum of $2 million; aggregate bonding of $4 million. Aggregate bonding refers to the maximum amount in total outstanding bonds the company can have. Remember that, as a project is completed the exposure decreases and accordingly, the bonding required for that project decreases.

Other things bonding companies look at to determine the bonding program are the list of jobs on hand and the year in perspective. Does the company average jobs of $200,000-$300,000 but occasionally garner projects of $1.5 million? Is there a large job that’s scheduled to commence in a couple of months? Assuming the larger projects are also fully bonded, the bonding program should reflect this pattern otherwise the construction company would have insufficient bonding capacity on a per project basis to cover the larger projects. Consequently, bonding agents look at the spectrum of jobs performed and anticipated for the year and those from the previous year, the contract value of each job, and the length of each job.

Bonding companies seek a 3:1 debt ratio on the balance sheet. Therefore, whatever you can do to decrease your debt will improve your ratio. As stated previously, you or an investor or partner can inject equity capital. You can pay off a term loan. You can restructure existing loans. However, bonding companies can tailor the bonding program to fit the balance sheet. If all your jobs are fully bonded, this could pose a problem. If only some of your projects are bonded, the tailored bonding program may meet your needs.

In addition to SBA-guaranteed bonds, another way for up and coming companies who have had difficulty procuring bonding to obtain some bonding capacity is through 3^rd party indemnities. These can be provided by the seller if you are buying a company, by an investor, or by a joint venture or other partner.

Bonding companies strongly prefer reviewed financials. Of course, if they can get audited financials, that is the strongest preference but bonding companies understand that the cost difference between audited and reviewed financials is significant – often several thousand dollars. For a long-term customer, bonding companies may take CPA-compiled statements. However, when that customer seeks more steady bonding or presents a weaker balance sheet, the bonding company will want to switch to reviewed financials. With reviewed financials, the bonding company can be certain that the financials presented to them are accurate and reflective of the company’s true condition. Why audited or reviewed? With Quickbooks only data, a company’s owner or CFO may add false data, delete information, or manipulate timing to make their statements look better. Or they may simply make mistakes due to unfamiliarity with generally accepted accounting principles (GAAP). With no credible outside source (CPA) reviewing the information, the bonding company cannot be certain. CPAs and their accounting activities are regulated. Private company owners and CFOs are not. (Of course, outright fraud is always illegal but can be difficult to prove unless glaring.)

Most bonding companies like personal guarantees or other guarantees to 100% of the bond. Remember, bonding is NOT insurance. Bonding, unlike insurance, is not a risk product. Bonding’s purpose is to ensure that the project continues with minimal hiccups as smoothly as possible. In the rare instance that the bond is called upon to pay, the bonding company expects full reimbursement of their payouts, up to the bond limit. In general practice, if the bond company must pay out, to the extent that it was their customer’s fault through overt negligence or fraud, the bond company will pursue full repayment. To the extent that it was not their customer’s fault AND the customer helps them as much as possible to mitigate the payouts, the bond company will pursue only partial repayment.

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.

How to Successfully Navigate Your Business through an Economic Downturn

by: Terry H Hill

An economic downturn is a phase of the business cycle in which the economy as a whole is in decline. This phase basically marks the end of the period of growth in the business cycle. Economic downturns are characterized by decreased levels of consumer purchases (especially of durable goods) and, subsequently, reduced levels of production by businesses.

While economic downturns are admittedly difficult, and are formidable obstacles to small businesses that are trying to survive and grow, an economic downturn can open up opportunities. A well-managed company can realize the opportunity to gain market share by taking customers away from their competitors. Resourceful entrepreneurs capture the available opportunities, from an economic downturn, by developing alternate methods of doing business that were never implemented during a prior growth period.

The challenge of successfully navigating your business through an economic downturn lies in the realignment of your business with current economic realities. Specifically, you, as the business owner, need to renew a focus on your core clients/customers, reduce your operating expenses, conserve cash, and manage more proactively, rather than reactively, is paramount.

Here are best practices that will help you to successfully navigate your business through an economic downturn:

Goals:

The primary goal of any business owner is to survive the current economic downturn and to develop a leaner, more cost-effective and more efficient operation. The secondary goal is to grow the business even during this current economic downturn.

Objectives:

• Conserve cash.
• Protect assets.
• Reduce costs.
• Improve efficiencies.
• Grow customer base.

Required Action:

• Do not panic… History shows that economic downturns do not last forever. Remain calm and act in a rational manner as you refocus your attention on resizing your company to the current economic conditions.

• Focus on what YOU can control… Don’t let the media's rhetoric concerning recessions and economic slowdown deter you from achieving business success. It´s a trap! Why? Because the condition of the economy is beyond your control. Surviving economic downturns requires a focus on what you can control, i.e. your relevant business activities.

• Communicate, communicate, and communicate! Beware of the pitfall of trying to do too much on your own. It is a difficult task indeed to survive and to grow your business solely with your own efforts. Solicit ideas and seek the help of other people (your employees, suppliers, lenders, customers, and advisors). Communicate honestly and consistently. Effective two-way communication is the key.

• Negotiate, negotiate, and negotiate! The value of a strong negotiation skill set cannot be overstated. Negotiating better deals and contracts is an absolute must for realigning and resizing your company to the current economic conditions. The key to success is not only knowing how to develop a win-win approach in negotiations with all parties, but also keeping in mind the fact that you want a favorable outcome for yourself too.

Recommended Best Practice Activities:

The Nuts and Bolts… The following list of recommended best practice activities is critical for your business' survival and for its growth during an economic downturn. The actual financial health of your particular business, at the outset of the economic downturn, will dictate the priority and urgency of the implementation of the following best practice activities.

1. Diligently monitor your cash flow: Forecast your cash flow monthly to ensure that expenses and planned expenditures are in line with accounts receivable. Include cash flow statements into your monthly financial reporting. Project cash requirements three-to- six months in advance. The key is to know how to monitor, protect, control, and put cash to work.

2. Carefully convert your inventories: Convert excess, obsolete, and slow-moving inventory items into cash. Consider returning excess and slow-moving items back to the suppliers. Close-out or inventory reduction sales work well to resize your inventory. Also, consider narrowing your product offerings. Well-timed order placement helps to reduce excess inventory levels and occasional material shortages. The key is to reduce the amount of your inventory without losing sales.

3. Timely collection of your accounts receivable: This asset should be converted to cash as quickly as possible. Offer prompt payment discounts to encourage timely payments. Make changes in the terms of sale for slow paying customers (i.e. changing net 30 day terms to COD). Invoicing is an important part of your cash flow management. The first rule of invoicing is to do it as soon as possible after products are shipped and/or after services are delivered. Place an emphasis on reducing billing errors. Most customers delay payments because an invoice had errors, and therefore, will not pay until they receive a corrected copy. Email or fax your invoices to save on mailing time. Post the payments that you have received and make deposits more frequently. The key is to develop an efficient collection system that generates timely payments and one that gives you advance warning of problems.

4. Re-focus your attention on your existing clients/customers: Make customer satisfaction your priority. A regular review of your customers' buying history and frequency of purchases can reveal some interesting facts about your customers' buying habits. Consider signing long-term contracts with your core clients/customers which will add to your security. Offer a discount for upfront cash payments. The key is to do what it takes to keep your current customers loyal.

5. Re-negotiate with your suppliers, lenders, and landlord:

i) Suppliers: Always keep your negotiations on the level of need, saying that your company has reviewed its cost structure and has determined that it needs to lower supplier costs. . Tell the supplier that you value the relationship you have developed, but that you need to receive a cost reduction immediately. Ask your supplier for a lower material price, a longer payment cycle, and the elimination of finance charges. Also, see if you can buy material from them on a consignment basis. In return for their price concessions, be willing to agree to a long-term contract. Explore the idea of bartering as a form of payment.

ii) Lenders: Everything in business finance is negotiable and your relationship with a bank is no exception. The first step to successful renegotiations is to convince your lenders that you can ultimately pay off the renegotiated loan. You must point out to your lenders why it would be in their best interest to agree to a new arrangement. Showing them your business plan and your action plan that includes your cost-savings initiatives, along with "the how" and "the when" of the implementation of your plan is the best way to achieve this goal. Explain to them that you will need their cooperation to insure that you can survive, as well as, grow your business during the economic downturn. Negotiated items include: the rate of interest, the required security to cover the loan, and the beginning date for repayment. A beginning date for repayment could be immediate, within several months or as long as a year. The key is to realize that your lender will work with you, but that frequent and continual communications with them is critical.

iii) Landlord: Meet with your landlord. Explain your need to have them extend the term of your lease at a reduced cost. Make sure you have a clause in the lease agreement that entitles you to have the right to sublet any or all of the leased space.

6. Re-evaluate your staffing requirements: This is a very critical area. Salaries/wages are a major expense of doing business. Therefore, any reduction in the hours worked through work schedule changes, short-term layoffs or permanent layoffs has an immediate cost saving benefit. Most companies ramped up hiring new employees in the good times, only to find that they are currently overstaffed due to slow sales during the economic downturn. In terms of down-sizing your staff, be very careful not to reduce your staff to a level that forces you to skimp on customer service and quality. Consider the use of part-timers or the current trend of outsourcing certain functions to independent contractors.

7. Shop for better insurances rates: Get quotations from other insurance agents for comparable coverage to determine whether or not your present insurance carrier is competitive. Also, consider revising your coverage to reduce premium costs. The key is to have the right balance-to be adequately insured, but not under or over insured.

8. Re-evaluate your advertising: Contrary to the other cost-cutting initiatives, evaluate the possibility of increasing your advertising expenditures. This tactic realizes the advantage of the reduced "noise" and congestion (fewer advertisers) in the marketplace. The downturn period a great opportunity to increase brand awareness and create additional demand for your product/service offerings.

9. Seek the help of outside advisors: The use of an advisory board comprised of your CPA, attorney, and business consultant offers you objectivity and provides you with professional advice and guidance. Their collective experience in working with similar situations in past economic downturns is invaluable.

10. Review your other expenses: Target an across-the-board cost-cutting initiative of 10-15%. Attempt to eliminate unnecessary expenses. Tightening your belt in order to weather the downturn makes practical, financial sense.

Proactively managing your business through an economic downturn is an enormous challenge and is critical for your survival. However, through well-planned initiatives, an economic downturn can create tremendous opportunity for your company to gain greater market share. In order to take advantage of this growth opportunity, you must act quickly to implement the above best business practices to continue realigning and resizing your company to the current economic conditions.

Copyright © 2008 Terry H. Hill

Terry H. Hill is the founder and managing partner of Legacy Associates, Inc, a business consulting and advisory services firm. A veteran chief executive, Terry works directly with business owners of privately held companies on the issues and challenges that they face in each stage of their business life cycle. To find out how he can help you take your business to the next level, visit his site at http://www.legacyai.com

 

5 Creative Ways for Business Owners to Obtain Financing

by Tiffany Wright 

Capital is the crucial ingredient for any business to grow. This holds true whether you are a one-person firm with minimal revenue or a 100-person company with significant sales. Yet so many entrepreneurs and business owners complain about how difficult it is to attain. Here are just five of the numerous ways to access capital taken from the informative new book, Solving the Capital Equation. Use these ideas to spark your creative thought process and get the money you need to elevate your business.

·         Form strategic partnerships. Consider the following: Who is already reaching your client or customer base? Who offers products or services that may be a great fit for your client or customer base? Who has a skill set or functional expertise that your firm lacks? All of these entities would make great prospective partners. Identify them, then craft a win/win partnership. Why spend money you do not have when you have something else of value to offer them – your firm’s product and services! You can use partners to access the sales force, marketing, IT, accounting, management expertise - to name just a few – of the services you would otherwise have to pay for. 

·         Barter. As a business owner, you have a product or service that someone wants. Otherwise you wouldn’t be in business. You can barter these products or services for those products and services you need to grow your business or service your customer. Or you could barter for items you would typically remove from the company to pay yourself, then spend on personal items. You can barter for advertising, travel, legal or accounting services, televisions, landscaping, cleaning services… 

·         Find a strategic investor. Is there a larger company that would benefit directly from your service or product offering? If so, contact them. If you can convince them that your company can directly or indirectly positively impact their bottom line either through a sales increase or a cost reduction, you are likely to garner financing in the form of direct equity, a loan, use of their credit, prepaid contracts, or payment of development costs. Look around. Potential strategic investors abound. 

·         Tap your suppliers. Are you trying to rapidly expand your business and need money to pay your suppliers? Why not ask your supplier to advance you the money? If your expansion will contribute a sizable portion of your supplier’s annual receipts, you can induce the vendor to provide a 12-18 month loan by promoting how he/she stands to benefit. At the least, negotiate a 90-day payment arrangement.

·         Seller finance. Who knows the business or asset better than the person or entity selling it?  If you are growing your business through acquiring other businesses, seek seller financing. Give them a lien against the business so they get the business back if you default. Suggest it as a way for you to know you are getting what you paid for. Added benefit: reduces risks that the company has hidden problems which greatly decrease its value and that the owner would start another competing business.

 

“Excerpted from Solving the Capital Equation: Financing Solutions for Small Businesses ©2007 Tiffany Wright. Used with permission of Toca Family Publishing. All rights reserved. Order from Amazon or visit http://www.tocafamily.com.”

PERSPECTIVE ON THE ECONOMY AND ITS BUSINESS IMPACT

By Tiffany Wright

Have you wondered how, when you read about the quarterly performance of publicly held companies, the revenues could shrink but net income would be up? Sometimes this is simply due to the recognition of a one-time large expense for layoffs, asset writedowns, acquisitions, etc. in the previous quarter that does not repeat in the following quarter. For many others, however, the company either lost customers or customers did not buy as much as they did previously, thus resulting in a dropoff in sales. Having foreseen this, the company re-focused its attention on its operations and the accountability of all its various departments and reduced costs and increased efficiency and productivity. These activities reduced fixed and variable costs resulting in a significant reduction in expenses. This drastic decrease in expenses more than offset the decrease in revenue, leading to an overall increase in net income. In the current economy where there is a lot of pressure on top line revenues, such an occurrence is a good thing.
Yes, the economy is suffering. Many economists and other pundits constantly weigh in with their speculations on what will happen over the next one to two years, how long it will take to “recover”, and how bad it will get. The level of negativity in the business and financial press is at an all-time high with daily dire predictions. However, as any good business person knows, all economies are cyclical. A time of expansion with rapid creation of goods and services and rampant building and development is always followed by a contraction in which the pace of creation drops which then allows for the absorption of that which was created during the expansion period. When something is significantly overbuilt well beyond what the market can absorb, the contraction can last several years.

This happened in the telecom industry which rapidly expanded in the late 1990’s to accommodate demand from Internet companies that built out infrastructure based on projected customer usage. When that usage failed to materialize many Internet companies failed, dumping underutilized telecom capacity and used telecom equipment back on the market and bringing down many small, medium and a few large telcos in the process. The equipment was absorbed in a few years but the network capacity is still being absorbed.

How does that relate to commercial construction? In some areas of the country and the state residential construction has plummeted due to a confluence of factors. It is the reverse of the same perfect storm that created the residential building boom. In late 2005 many of my former real estate investment peers (I exited the market earlier that year) were complaining about being unable to sell or rent their renovated properties due to the high number of brand new properties on the market. Hard money lenders began taking hits because the investors could not execute on their exit plans. In July and August 2005 I interviewed a number of large apartment owners in the Atlanta area, those with 2,500 – 10,000 units. The concensus was the same: Do not enter the market unless you can maintain a debt to equity ratio of 60%. Since most properties at the time were purchased with 80% debt financing, that was a strong statement. You either infuse a lot of equity into the property or buy at a very undermarket price. Why did they say this? Because interest rates were so low and so many builders were offering near 100% financing that their target apartment dweller could qualify for a loan with almost little down and have payments that were the same or less than what they had been paying in rent. One owner had a new 250-unit apartment complex in the near suburbs just outside I-285 that enjoyed nearly 95% occupancy. However, a developer purchased the land across the road and built a townhome community then directly solicited the apartment tenants. The 2-bedroom rent was $650; the 2-bedroom townhome mortgage payment was $599 per month with the introductory low interest rate. The complex’s vacancy rate doubled. The complex reduced its rent to $595, included 1-month free, and added other amenities to stop the loss. This worked but obviously significantly impacted cash flow. Hence, the recommendations for 60% debt-to-equity.
Residential home construction typically precedes commercial retail construction. Retail centers need people who live in the area to patronize their establishments. Many retail entities followed the same rapid expansion as the residential construction. Those with the most aggressive expansion campaigns with the most debt or undervalued land holdings have been impacted the greatest. Thus, the dropoff in the commercial retail sector is large and expected to increase. Most of this dropoff is / will be felt in the outer suburbs of Atlanta where the plummet in residential construction is the greatest.

Three years ago, for a former client, I contacted 20 different condo developers in the Atlanta region to inquire about partnering. It was a highly informative endeavor. I learned that some developers were quite bullish on the Atlanta area, while others thought the high-end condo market would tank soon and that the mid-range condo market would be hit but could withstand the shock. Still others were down on the market overall and had begun to expand into other more viable (their words) markets until the downturn came and went. They discussed what areas were the most viable for condos (i.e., Buckhead, Midtown, Centennial Park), what others were more questionable (Old Fourth Ward, Poncey-Highlands), what pricing points could be supported, and what amenity levels were needed to hit the target buyers and how much those amenities cost. When you need research, there’s no better source than your suppliers, customers and competitors.

As a result of these interviews, I anticipated the slowdown in the condo market. I also anticipate, like the developers I interviewed, that many condos will rebound quickly in key areas because the underlying assumptions still hold. Thus, those construction companies that do a lot of condo work are experiencing a slowdown now and likely through much of 2009 but the work will begin to increase again in 2010. Financing may be more of an issue than demand for the condos.
The point of this article is to provide those who may not have great access to research reports - which can be very costly although sometimes well worth the money - quarterly research updates, and monthly summaries with the key to accessing information. Spend time talking to your customers about their business and the outlook for their business. If you are a subcontractor far down the line with few strong relationships, start building them. In difficult times people turn to low-cost providers AND to those whom they trust to get the job done well – on time and on budget. Many of those that compete only on price go out of business in an economic downturn. They have no real connection to their customers, they have shoddy operations and poor customer service. If you want knowledge on a budget, talk to your customers or their customer or the owners – go up the food chain if you must. You need to know and understand what’s driving your market. For real, not what all the experts and pundits who don’t know your specific business and circumstances. Not only will this knowledge help you plan and adjust your business, operations, and financial management accordingly and thus strengthen your bottom line and increase your net income. It can also build your relationships and thus strengthen your top line and maintain or increase your revenues.

You can sing the blues about the economy or you can try to understand what’s driving the impact on YOUR business – YOUR customers, YOUR suppliers, YOUR competitors. You can empower yourself and your employees to think differently because if you’re business is suffering, your old way of thinking and doing things is not working. If your sales have slumped, you can think of that as an opportunity to build a stronger, more viable business. Start marketing. In a down economy, many companies cut marketing first to save money. Therefore, you now have less competition for eyes and ears. You stand out more and convey size and strength when you market while your peers are silent. Get a handle on your cash management. Make sure that you keep your accounts receivables as close to 30 days outstanding as possible. Follow up (nicely) on a consistent, systemized basis. Streamline your operations. Install or upgrade computer systems. Shift personnel. Focus on what you can do and do it. Empower yourself and your employees to strengthen your bottom line and thrive in any economic environment.

Tiffany Wright is the publisher of Equal Construction Record and owner of Toca Family Services, LLC, which provides interim management and project-based financial management services to small and medium businesses. She can be reached at twright@tocafamilyservices.com. This article is copyright protected. All rights reserved©.

Barter Exchanges Catch On as Credit Tightens

Shawn Cressman, president of Cressman's Lawn & Tree Care, the business his father started 33 years ago in Bethlehem, Pa., has occasionally engaged in bartering with other outfits over the years. But transactions were usually informal and not necessarily directly tied to the company's bottom line.
These days, though, Cressman sees bartering as a significant way to reduce cash outflow. Last fall he joined the Stroudsburg (Pa.) Merchants Barter Exchange, an association that coordinates and organizes trading of products and services among its more than 10,000 business members. In September, when the transmission blew on one of the firm's trucks, Cressman turned to the exchange and bartered for a replacement. "That would have cost between $1,500 and $2,000, and that was not in my budget," he says. He also bartered to acquire a $4,000 piece of stone-crushing equipment. "I probably wouldn't have bought one this year," he says. "It would have had too much of an impact on my cash flow." But as a result of strategic bartering, Cressman estimates he has been able to save about $6,000 total so far this year.
In recent years, bartering has gained currency as a relatively easy path for small outfits to attain goods and services without having to dig into their coffers. It has also become a successful channel to attract new customers and expand one's business. According to the most recent numbers compiled by the National Association of Trade Exchanges (NATE) in Mentor, Ohio, some 400 barter exchanges in the U.S. and Canada generate transactions worth $4 billion a year.
On the Upswing
And now, with banks cutting back on credit lines or shutting them down altogether, the use of barter has gained renewed momentum. Notably, Thailand, the world's largest rice exporter, last month announced it planned to barter rice for oil from Iran, one of world's top 10 rice importers. For small businesses, ramping up their own use of barter is a strategy that allows them to reserve cash and still expand operations at a time when credit lines have yet to thaw.
Tom McDowell, executive director of NATE, says he has seen a 10% to 12% increase in new clients joining organized barter exchanges. "Suddenly, [business owners] were running into different obstacles, and they started looking for other avenues for resources, not just credit," he says. "The interesting thing that is happening in this economy is that businesses still have inventory and capacity. They still have expenses. What they don't have is customers."
Barter exchanges (BusinessWeek SmallBiz, 4/16/08) are fee-based membership groups. Typically, barter dollars are issued when a member performs a service or offers a product that can then be used to purchase goods or services of another member within the exchange. (The exchange receives a commission on the "purchase" side of the transaction.) Most exchanges work on a 50-50 cash-to-barter system, while others, such as Merchants Barter Exchange, operate as a 100% barter trade system. Most offer lines of credit that can be used to snap up a host of items, from carpet cleaning services to office supplies to large equipment.
A Way to Get Credit
Merchants' founder, Steve Bolles, says membership in his eight-year-old exchange, which has offices in 30 states, has tripled this year. As the financial situation remains bleak, Merchants continues to ramp up clients. "Just 18 months ago, when we would go and talk to business owners about signing up, they would say, 'We don't need to talk to you.' Now everybody gives us an appointment." A strong inducement: "Everyone we sign up gets a line of credit right away," Bolles says.
"Most people are looking to conserve cash," says Ralph Sigler, who owns Carolina Packaging & Supply in Raleigh, N.C., and belongs to two different exchanges. "We started bartering about 12 years ago. The way we were growing, it made sense to substitute barter dollars for cash dollars." Sigler says he bartered to obtain everything from security system installations to letterhead and envelopes. "I've saved anywhere from $20,000 to $25,000 a year by bartering, and I've also taken on a lot of new accounts."
Bartering serves as another avenue to help keep businesses afloat. "I would say my bartering has gone up 20% in the past six months," says Mike Cody, owner of Chip & Crack Windshield Repair in Garner, N.C. "At first I used it for hotel stays and gifts to employees." Now he says he has begun to barter to obtain equipment for his business instead of having to spend cash. "If I were to make a guess, I'd say that I've saved over $1,000 this year."
"Eventually we will see a shift in thinking," says NATE's McDowell. "What will happen is that people who were reluctant to use the credit line, or used it sparingly, will see the tremendous credit crunch and will look for new resources. They will find that they can use trade exchanges."
Perman is a staff writer for BusinessWeek.com in New York