Know when it’s time to sell ‘old bessie’
If you’re a typical electrical contractor, you’ve probably accumulated fixed assets as the business grew. Calculating ROA, or Return On Assets, will make you aware of just how fixed asset-heavy your company has become. Divide net profit by total assets and compare the percentage to the 2002 NECA Financial Performance Report. Collectively, all firms reported 6.58 percent, but the high profit group showed an ROA of 14.94 percent. Targeting 8 to 12 percent should give you a reasonable goal.
Now, divide your annual sales by your total assets. In the same report, electrical contractors reported sales of 3.07 times assets, with the high profit group showing slightly more, at 3.12. This is a measurement of capacity, so sales revenue growth demands more assets to support growth. Or does it?
Today, liquidity is the name of the game, and your goal should be to have 75 to 80 percent of your assets in the “current” category—cash and line items that become cash quickly, such as accounts receivable and inventory.
So what do you do with those fixed assets you have accumulated? You need the buildings, equipment, tools and vehicles to make money, right? In fact, wise management of fixed assets is like raising hogs.
Hog farmers recognize that hogs drain cash. They must be fed, watered, sheltered and kept healthy. There is an optimal time to take them to market. If too much money is invested in the hog before it goes to the market, the farmer doesn’t receive his or her return on the investment. Eventually, the farm fails.
Farmers also understand that they can’t become too emotionally attached to their hogs, or they won’t be able to part with them at the right time. Electrical contractors must also take the emotion out of asset investment. If you’ve ever given your car a name, you remember how hard it was to sell “old Bessie.”
Assets are like muscles. Each has its own function. Your company assets must be functioning as they are meant to, and if they are idle too often, the business becomes a couch potato. So keep your assets working, and strengthen the muscles to run your business.
Take a hard look at everything you own. Does each electrician have a company truck? Can you lease the vehicles instead of own them? Can you work two shifts and have your electricians share trucks? Not only will this approach double the hours of use for your vehicles, but you’ll avoid the risks of liability and workers’ compensation you take when your employees use your vehicles and tools for side jobs.
Analyze your equipment use. If there is an item being used fewer than 24 days each year, you might want to rent it. Some electrical contractors are even joining to form separate rental companies. The rental company leases equipment, which it then rents to the partner contractors at a preferred rate, and sometimes to outside contractors at a higher rate.
If a project is delayed, give your customer the option of keeping the equipment on site and available—but charge for it. A reasonable “idle time” hourly equipment charge covers loan payments, insurance, and other costs which continue whether or not the equipment is being used. Don’t leave the equipment on the site without collecting something in return for keeping it available.
Renting and leasing are two ways to take your hogs to market. Even though your cash flow is reduced by the rental or lease payments, you gain predictability. You don’t risk paying for repairs on rented equipment, and some leases will include routine maintenance.
One caveat—don’t sell off all of your fixed assets at once. Divesting, or liquidating assets, sends up a red flag to lenders and bonding companies. They may think the business is failing, and you are turning everything into cash so you can take the money and run.
If you are providing company vehicles to your employees, give them the option of taking the equivalent value as part of their salaries. You have just reduced the risk of incurring deductibles for accidents, liability for injuries, and unexpected repairs, in favor of a predictable salary expense.
It might be hard, at first, to change your thinking. After all, a big building, a parking lot full of vehicles, and equipment sporting the company name is a boost to most owners’ egos. Taking the emotion out of asset management requires creativity, and if you insist on giving your company assets cute names, at least take a lesson from the movie “Babe.” The pig didn’t go to market, but he made another kind of useful contribution to the farm—as a sheepdog, managing other assets. There are always new ways to bring home the bacon. EC
NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at email@example.com.