"What's that?" asked my colleague. The investor explained that during a conversation over lunch he found out this person was funding a $2,200 Porsche lease through the business. He appeared interested in having the business pay for his personal lifestyle. The investor explained to my colleague that his money was not going to pay for a car lease. His investments were supposed to help grow the business, not the owner's desire for the "finer things of life." He went on to explain that he called this the Mercedes-Benz syndrome, where the business pays for the owner's unnecessary personal assets. Investment that is supposed to go towards the business instead goes towards the owner's personal needs.
It struck me that a lot of contractors do this, too. I know some. You probably know some. These contractors don't understand that cash does not mean profits and that having cash does not mean that you have to spend it. These contractors use the business cash to buy boats, have the company pay for expensive trucks and cars, write-off vacations or build an expensive home. Instead of investing in the business, they invest in themselves.
Some indulgence is OKDon't get me wrong. There is absolutely nothing wrong with enjoying some of your profits. However, you shouldn't do it at the expense of your business. The HVAC industry is very cyclical and you have to save cash for the downturns. You have to save for the inevitable rainy days.
Sometimes you have to save for years. A mechanical contractor I know had 10 years of 15-percent profits before taxes. During this time, company officials did not take a lot of money out of the business. They paid modest bonuses and invested back in the business. This year, work decreased dramatically and they had to layoff people. However, they will survive this downturn because they have the cash to do it. Ten years of savings will allow them to survive.
You don't have to save and reinvest every penny. Just save 1 percent of every dollar that comes in the door. When you make a deposit in your operating account, you write a check for 1 percent of that deposit and put it in a savings account. Some contractors I work with do it once a week rather than every time a deposit is made. Don't take longer than a week to write the checks though - the amount starts looking big.
The idea is to make the number look small. If you have a $1,000 deposit, writing a check for $10 seems painless. The key is to be disciplined and do it with every deposit. The easiest way is to have your bookkeeper prepare a check when he or she prepares the deposit. Whoever goes to the bank deposits the checks in the operating account and the 1-percent check in a savings account.
One contractor company I work with saves 3 percent. How much is enough? I suggest never touching the 1-percent savings unless you're running short of cash. I realize that it's easier to make a withdrawal from this saving account than make a collection call. However, make the collection call first.
Another contractor I work with keeps six weeks of payroll (including taxes and benefits) readily available. His feeling is that if something dramatic happened, he could still cover payroll.
You might also feel more comfortable with a bank line of credit. If so, do this in addition to saving the 1 percent.
You have to decide what you're comfortable with. Saving a little is easy to do. It's also easy not to do. The choice is yours.