Working capital
is essential to your success. If you “live on the edge”, always
desperate for the next client check, you put too much pressure on
yourself and your family. You threaten the survival of your company,
and the loss of all your hard work. You have to make payroll every
week; vendors must be paid regularly to maintain lines of credit;
equipment needs fuel, maintenance and repairs; taxes must be paid
(or they’ll follow you for decades). That’s working capital. You’ll
also need money for rent, computers, office supplies, etc. Remember:
if you write a check to an employee this week, it may be 40 to 70
days before you get paid for that expenditure. In the meantime
you’re relying on your working capital to keep you in business (in
other words: you are borrowing from yourself to pay expenses until
you receive payment from your clients).Guidelines: for specialty
contracting businesses: $50,000 cash and assets of $100,000 or
more; for building general contracting businesses: $25,000 cash and
assets of $100,000 or more; for engineering contracting businesses:
$50,000 cash and assets of $100,000 or more (these are suggested
minimum guidelines and are not based on any particular law or
requirement).
-
The reason subs
need more than most generals is because they are incurring more
payroll expenses and are further from the stream of cash flow on a
project. If your business is growing you’ll need more than the
guidelines. If you take on multiple projects, you’ll need more –
you don’t want to fall into the risky business of finishing one
project with the first draw from another.
-
A subcontractor
needs to remember that it is depending on the prime contractor’s
on-time receipt of money from the client (they get delayed, you
get delayed). Also State law says the sub should get paid within
ten days after the prime gets paid. Subs: get to know your prime
contractor and assure that you have a good relationship, and that
you are “taking care of business” (meeting the project schedule,
responding to punch lists, etc.), so you can get paid within those
ten days.
- Contact
prospective bonding agents (see
step #18) for their
guidelines on bonding, which you will need at some future point
Note: the best
working capital comes from your savings. Postpone starting your
business until you’ve saved enough money. It is unlikely any bank
will loan a new business working capital (but anything’s possible)
so if you want to borrow working capital, it will likely be from
family and friends – high risk for them, potential embarrassment for
you, since new business ventures have a high failure rate. Your home
equity can be a source of working capital, but be very careful not
to over-borrow early depriving you of a fallback source of capital
if you get in a pinch. The best scenario: initial working capital
from savings with a home equity line of credit strictly for genuine
emergencies.If you try to
start a business with little or no working capital, expect to lose a
lot of sleep, alienate friends and family and probably fail within
12-18 months. Fly your plane without fuel only if you are already
airborne and it’s your sole option.
|
|
