Disciplining Your Money

By Charles Vander Kooi

Many contractors are in financial trouble, not because they are not making enough money, but because they are not managing their money properly. Here are some concepts about and methods to use to discipline money.

Be objective about your ability to handle money. Be realistic about your employees or partners abilities with money. There are people who simply cannot control their spending, let alone discipline the companys money. As soon as they see money in the check book whether it be a personal checkbook or a company checkbook they spend it.

Sound like you or an employee who has access to your companys coffers? Do them a favor. Set up a system of accountability that will keep you, the employee, and the company from being victimized. You can do this several ways.

  1. Turn the checkbook over to someone else so you or they must go to another person for a check. The big spender can still sign these checks, if necessary.
  2. Have the accountant issue the payroll and monthly accounts-payable checks, and then set up another account from which the big spender can make minor and emergency expenditures. However, keep the balance in the second account as low as possible.
  3. Set up a committee of levelheaded people who will advise the big spender about expenditures which exceed a specific amount.

Some of these may sound embarrassing to a contractor; but they are less embarrassing than bankruptcy.

A second thing everyone needs to understand and do is down-and-dirty accounting. This simply means a contractor must acquire the ability to determine quickly where he stands financially. It is important to get monthly profit-and-loss statements. However, many times those statements dont reach a contractor in time for him or her to make decisions about spending money. Consequently, the contractor always needs to have a feel for where he stands financially. Many times, there may be money in the checkbook that looks like profit, but when you consider all of the upcoming bills, there is no profit for spending.

Contractors often receive large sums of money for their work. Rather than look at the bills which are coming due, some contractors look at the money they have in the checkbook, and do not apply any down-and-dirty accounting to that money. Consequently, they spend it and find themselves in trouble down the road.

Many contractors keep approximate financial records in their own desk, just to maintain a daily feel as to where the company is financially. Accountants must submit an excellent book keeping record to them on a monthly basis, but the contractor keeps this personal record for the purpose of his own money discipline, as well.

The contractor should do this down-and-dirty accounting every month after having received a financial statement. Remember, just because a financial statement indicates that a contractor has made a profit, does not necessarily mean that he has made a profit. He must always question each statements results until he is certain that everything has been included. If the statement does not show some outstanding payables or some unbilled jobs, the overall picture will be off. Every month, there should be an over-and-under-billing meeting. During this time reexamine every job and every account to make sure that the financial statement reflects reality.

Lets look at what can happen to a contractor. A financial statement shows a larger than normal profit, which is the first sign that something could be wrong. He begins to spend some of his money. After a year, the insurance company audits the company and hands them a bill for almost $40,000 in additional insurance premiums for Workmens Compensation and for liability on their payroll. Initially the insurance company quoted them and they paid a premium on an amount based on a payroll that has since doubled. They collected the additional money through their labor burden percentage, but it had not shown up as an expense in their financial statements. That was because the insurance company did not detect the increase until they audited the companys books at the end of the year. The extra money had shown up as a profit, which the company spent.

There is a method which can prevent such things from happening. Setup separate bank accounts for all items from which the contractor receives payment on a daily, or monthly, basis, and that the contractor makes payments on quarterly, or even annually. Some items might fit into this category are certain taxes, insurance of all kinds, equipment maintenance expenses, licenses, yearly fee, dues, etc. On a monthly basis, write checks for each of these items in the amounts you charge clients for those items. Deposit those checks in the separate savings account designated for each item. Monthly profit-and-loss financial statement will now include these costs because you wrote a check for them. Also, when the bill finally arrives, there will be money in an account to pay it.

A third item about money discipline can almost go without saying, except it is too important not to mention. A contractor should bill every chance they get, and then be a regular tiger about collecting their receivables as quickly as possible.

Some contractors feel embarrassed to bill their job. They feel even more embarrassed to hound their clients for prompt payment. These contractors will not last very long in this business unless they take on an aggressive billing and collecting policy. Very few days should go by without bills of some sort going out, and call being made about receivables. A client might require a certain period of time to pay a bill. Send the bill right away and the time period begins sooner, which means the time when they will pay your company will be sooner, too.

A fourth item about money discipline involves a moneymaking principle. A contractor should take advantage of every discount of 2 percent or more, without fail, and 1 percent if they are able. One can borrow money to take advantage of a 2-percent discount on supplies, and still save more than the interest charged on the borrowed money. At 1 percent it becomes almost break-even. But, if a contractor has the money, getting the discount will pay them a better return than having the money in a savings account.

Finally, here is a principle by which one should live both in business and in personal money discipline: Do not spend all your cash.There are those who believe in buying everything for cash and, thus being debt free. If they are so well healed that they can do that, of course, that is a good position to take. However, since almost no one is in that position, a better position to take is one which maintains a balance between debt and cash in CDs, or in Money Market accounts, or as cash reserve against the payments of the debt.

This business is so volatile wherein all companies should keep a cash reserve for an emergency situation. It will carry them through a potential downturn in their workload. If they use all of their cash to pay for equipment or other purchases, they will not have payments on a monthly basis, its true; but, if things take a turn for the worse, they will not have the cash to survive. At that point, in a bad situation, they will be at the mercy of a lending institution to loan them money in bad circumstances. If they finance a part of the equipment, and keep a cash reserve, they can make the payments, and keep going during a bad time, without depending on a lending institution.

Remember, a contractors long-term success will not just depend on his ability to make money but, also, on his ability to handle the money well.

Seminars offered by Charles Vander Kooi
Estimating & Bidding Balancing Estimating, Job Costing, and Accounting People Management

Charles Vander Kooi Biography:
Charles Vander Kooi has been involved in the construction industry for over 30 years, thirteen as an upper-management employee of companies and seventeen as a consultant. He has bed over a billion dollars in work over his career. As a private consultant, he has helped over 1,200 companies in their estimating/bidding systems and has lectured to over 70,000 contracting people nationally and internationally.

Constantly in demand, Mr. Vander Kooi speaks at an average of 100 Trade Shows and Conventions annually, teaching his philosophy across the U.S., Canada and Australia. His company consults with an average of 100 clients annually to assist in improving their performance.

He has authored eight books to the industry and his seminars are available on audiocassettes as well as videos.

Vander Kooi and Associates, Inc.
Phone: 303.697.6467, Fax: 303.697.6815

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