Nick Cogliani, CEO, NEWPRO, Woburn, Mass.
Our company always puts away cash during good times. We try to save 10% of our annual sales. This amount is a number I am comfortable with, as it provides about three to six months of operating expenses. We keep the funds in a low interest–yielding account at our bank. We maintain a line of credit at the same bank. We did not need to use our line of credit or our cash reserve this year.
Jack Philbin, president, Philbin Construction & Remodeling, Crestwood, Ill.
I have always been a strong advocate of cash reserves and believe in “visiting with your money” on a weekly basis. My comfort threshold is a minimum of two months ready cash to cover all overhead costs with no additional income.
I set aside these reserves on a monthly basis based on my own monthly financial statements. It is in an interest-bearing account separate from our general business account and at a different bank, so there is no confusion. I can wire the cash from one account to the other without having to make actual visits.
I also maintain a line of credit with my bank and am in regular communication with the loan officer to remind him I’m around. My line of credit has varied from $50,000 to $580,000. I haven’t used my line of credit this year, but we are getting close.
Scott Heron, owner, Creative Tile, West Columbia, S.C.
The economy and construction in general is cyclical, and it takes time to adjust for the ups and downs. When things start slowing down and your cash flow changes, you need to be prepared to pay your bills and adjust your overhead. You need to be able to handle any warranty work and have good customer service before, during, and after the sale. These are the things that will keep you in business for a long time. And when things pick up, it takes time and money to train good team members and [it takes] cash to get the best deal on equipment.We typically try to have six to 12 months of operating expenses in cash. We set aside the money on an accumulative basis. A money market account gives us a little interest, but the main thing is having immediate access to the funds. Right now, sales are increasing, so we will set aside more cash.
I have a high level of trust with my local bank and want them to be involved in all aspects. Although we do have lines of credit in place, it is too risky to depend on them if the bank decides to decrease their availability or eliminate it altogether.
Terry Hulm, owner/manager, All Star Construction, Rapid City, S.D.
We are a design/build remodeling company. I began funding our operating capital reserve account (OCRA) in July 2005 after reading an article in a trade magazine. I decided to contribute $5,000 monthly, as our average monthly revenue goal was $150,000, and I used 3% of it as my guide.
By December 2008 we had accumulated $150,000 in the OCRA. I made a decision to put it to work for us by putting it in a three-year CD, which would earn us another $16,000. Even though that money wasn’t available to us in the form of cash, I knew I could use it for collateral if necessary. When the need came in March of this year, I took the $15,000 cash we had contributed since January. When that money was gone, I increased our existing $150,000 line of credit to $250,000 for safety purposes, using the CD as collateral.
I wanted to make sure we could pay our bills and operate our business even though our revenues had been severely reduced. This summer our projects started coming back again, and by October we had paid back the $130,000 we used of our line of credit. We have also started contributing again to the OCRA. My goal for our OCRA is to accumulate $250,000 as insurance against future setbacks or whatever may come our way.
Michael Brindisi, president, Brindisi Builders, Marlton, N.J.
I set aside 20% of the net earnings at the end of the fiscal year. We keep this money in a business money market account. This allows us cash for major expenditures in good times and cash flow when times are challenging.
This cash reserve has been what has kept us going this year. We utilized that fund to support a major advertising campaign this year. While our competition was holding back, we were aggressively attacking the remodeling market with great success. It has allowed us to recover our investment, and we might even end this year with a net profit. We have a line of credit and use it for capital improvements to our facility.
April Bettinger, general manager, Shirey Handyman Service, Issaquah, Wash.
We established a $50,000 line of credit several years ago and paid a yearly fee and submitted financials for renewal of the credit. For several years we had significant growth and cash on hand. [For us,] 2008 was a record profit year. We had been saving cash and had six figures in the bank, so in July 2008, we opted not to renew the line. Then in October 2008 the Northwest was hit with the economic slump that felt like we stepped off the edge of a cliff. By the time we realized the gravity of what was happening, financing was so tight and revenues had slipped to about one third of normal, and getting a new line established was slim to none at the time.
We lived off the cash earned in good times and, thankfully, had it to span the gap. A year later, most of the reserve has been used and business has taken a turn back to profitable again. Cash is still tight, but we chose to open a separate savings account, and my bookkeeper transfers money to that account every week. It isn’t much, but it is good to know that there is some fallback if needed. Where we used to transfer $1,000 per week, we now manage about $500. With a company of about $2 million in revenues, it was comfortable to have at least $100,000 cash on hand or available for operating expenses. Present time we are making do with about a $10,000 to $20,000 cushion with 60% of the revenue. Lean times!
This is a longer version of an article that appeared in the January 2010 issue of REMODELING .