“Right timing is in all things the most important factor,” the Greek poet Hesiod wrote. For an electrical contractor, the timing of decisions often makes the difference between success and failure. If you become aware of the effects of timing throughout your business, you will notice improvements in your bottom line.
Ideally, all of your employees would be paid only for the time they actually work, and the most important timing decision would involve coverage of their duties while they are away. When employees are paid for vacation time, avoid hiring temps. Cross-train backups, and insist that key people complete necessary projects before taking time off.
Faulty decisions often occur during hiring and firing. The more accurately you anticipate workload fluctuations, the better you can plan for layoffs and prepare valued employees for possible rehire. There also is a balance between the experienced employee who is highly paid and the newer employee who does an adequate job for less. There will always be a point where even the most valued employee may become unaffordable. Unlike the NBA, the construction industry has no guaranteed contracts, so be prepared to make tough decisions, which may include early retirement.
You probably make it a priority to pay invoices on time while struggling to collect receivables within 60 to 90 days. If you can obtain a discount of 1 or 2 percent for paying within 10 days, it’s worth tapping your line of credit at today’s interest rates, but don’t ever pay early if there is no benefit for doing so. If your supplier invoices are due in 30 days, pay on the 29th day.
Negotiate adjusted due dates with creditors. There is no reason why all invoices must be paid on the first of the month. Spreading them out or timing them to coincide with payments from your customers will improve your cash flow and reduce short-term borrowing.
Stay vigilant about your collection process. Collecting three to four days earlier and paying suppliers three to four days later adds up to an extra week of positive cash flow and will not generally affect established business relationships. Watch out for customers who try to string you along. Also, ensure you file required lien notices promptly, or you will lose the few rights you have under state payment statutes.
Interest rates have been so low that you may not be thinking about negotiating better deals right now. Payback schedules can be negotiated and can significantly reduce total interest. Paying half of a mortgage payment every two weeks adds an extra payment each year, is gentler on your cash flow and can pay off a 30-year mortgage in approximately 20 years.
Remember, when you buy property, timing the closing of escrow near the end of the month is advantageous because you must pay interest on your loan for the days remaining in the month of the closing. If you close on June 15, for example, you must pay interest for the last 15 days, while closing on June 29 requires you to pay interest for only one day. The next mortgage payment would be due August 1, in either case, but your cash outlay at closing varies significantly and is not part of your amortization schedule. So, don’t squander the extra cash.
Eventually, all assets must be replaced. If you have extra cash stashed away, you won’t be forced to tap available credit lines when interest rates rise. However, it also is effective to plan asset replacements to avoid unanticipated purchases. Every asset has a predictable useful life, and the investments you make in properly timed maintenance will increase that life and reduce replacement costs. Leasing versus buying decisions also affect the cash investments required to keep assets productive.
Market demand has an effect on pricing and, by extension, profits. Know your competitors, and you will be able to adjust your pricing. For example, raise your price on a risky job for a less preferred customer, and let the competition win the project. Time these decisions in a high-demand market, so you can grab the best projects at a reasonable profit while your competitors are too busy to take on more work. Perfecting this strategy enabled my father to establish a requirement for substantial deposits on nearly every new contract.
As you develop awareness of how timing affects your bottom line, avoid the temptation to try your hand at “timing the market” as an investor. Stock market investment strategies are so sophisticated and fluctuations so radical that the small investor has almost no chance of succeeding at market timing. Next month, we’ll review some tried-and-true strategies for investing all of the profits you will earn by improving the timing of other business decisions.
NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at firstname.lastname@example.org.