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View Full Version : Over extending your business


Steve
06-11-2009, 05:21 PM
I was reading an article on cnn about a family owned business who rents portable toilets. With the current economic downturn there isn't much construction going on. With less construction sites, there is less of a need for portable toilets.

http://www.bridalbuds.com/wp-content/uploads/toilet.jpg

Family fights to keep business out of the toilet (http://www.cnn.com/2009/LIVING/worklife/06/08/mainstreet.portable.toilets/index.html) - "We didn't take on a large amount of debt. We paid cash for our assets," he said. The company owns its property outright, including all its portable toilets, vehicles and equipment.

That's part of the business model Sharp said his parents taught him, and it's helped this family business survive and ward off bottom feeders who see the toilets sitting unused and think he's desperate to be bought out at a fraction of the cost.

"Had we spent outside our means, had we grown and leveraged everything, financed everything, we'd be in a really tough situation," he said. "Good business model: Storing money, saving money when you make money ... keeping things simple."

This is a great small business example on how saving money is so helpful. The economic cycle will go up and down over time. At times the economy will speed up with more spending and then there are times when it will slow down.

Some can argue that when the economy is really rip roaring, that it is a good time to go into debt so you can take advantage of all the free flowing money and profit more. What does this mean for the green industry? Well it's possible you might find yourself, during times of a good economy, swamped with customers. There is a lot less competition because more people are employed than looking to start their own business. They have money to spend on lawn care and you think this is great. You go out and finance a new truck or trailer or larger mower. Maybe you even take on a bunch of crews. You start leveraging your assets and may find you use your home as collateral on a loan to pay for all this stuff.

Then you find everything is going great and you are making all this money. Next thing you know it, the economy slows down and you don't have as many customers. So you lay off a crew. You start to have equipment sit idle. Next thing you know it you don't have the cash flow now to pay the loans on all this added equipment. You didn't save any money. If the economy slows for too long, you just might lose everything because you used everything you had as collateral to grow. You over extended yourself and this is how things collapse.

On the other hand, if you are able to save cash and pay for things as you go, you may not grow as fast as those who leverage their assets, but you will have a stronger foundation to grow from.

When the economy slows down, you will have minimal bills, you will own your business assets and you be more likely able weather the storm. Another great part about that is when the economy starts to rev up, you will be in a great position to take advantage of all the new customers and you will be able to scale up faster than others who would just be starting up.

What's your thoughts on this?

doug1980
06-11-2009, 05:37 PM
Well me having only taken a few business classes and being just a "good ol' country boy" from southern Indiana, this is great advice. Then again it sounds like just plain old common sense. I have a lot to learn about owning and operating a business, I admit, but I get a sense of enchoragement when something like this appears and that was exactly what I had planned to do any way. I can't imagine putting myself out there with no safety net.

turfmaster
06-11-2009, 06:43 PM
Then you find everything is going great and you are making all this money. Next thing you know it, the economy slows down and you don't have as many customers. So you lay off a crew. You start to have equipment sit idle. Next thing you know it you don't have the cash flow now to pay the loans on all this added equipment. You didn't save any money. If the economy slows for too long, you just might lose everything because you used everything you had as collateral to grow. You over extended yourself and this is how things collapse.

On the other hand, if you are able to save cash and pay for things as you go, you may not grow as fast as those who leverage their assets, but you will have a stronger foundation to grow from.

When the economy slows down, you will have minimal bills, you will own your business assets and you be more likely able weather the storm. Another great part about that is when the economy starts to rev up, you will be in a great position to take advantage of all the new customers and you will be able to scale up faster than others who would just be starting up.

What's your thoughts on this?

I agree with this philosophy totally. In fact that is the business plan that I have followed.

picframer
06-11-2009, 09:59 PM
It's a bit of a balancing act, wish I had a crystal ball some times. We could still add a pile of equipment and staff to catch up but it's time to put the brakes on unless an opportunity comes along.

When I hit three weeks of work ahead of us I start looking at possibly adding equipment/staff or if I get a really big contract and the profit would cover 40% of the equipment cost then I buy it.

I have taken a couple of zero percent loans from John Deere, what I do however is write them a cheque for twelve months payments in advance, they hadn't had this happen before but figured out how to put it through their software. Any purchase under $5,000 is paid by cheque.

I keep six months of cash in the company account to cover everything, it has very little debt anyhow.

Steve
06-11-2009, 10:08 PM
I have taken a couple of zero percent loans from John Deere, what I do however is write them a cheque for twelve months payments in advance, they hadn't had this happen before but figured out how to put it through their software. Any purchase under $5,000 is paid by cheque.

What is the benefit of doing that?

I keep six months of cash in the company account to cover everything, it has very little debt anyhow.
Would you advise others to do this too? Does the 6 months of cash cover all expenses the business would have during that time, so it could operate for that length with even no income?

picframer
06-11-2009, 10:26 PM
What is the benefit of doing that?


Would you advise others to do this too? Does the 6 months of cash cover all expenses the business would have during that time, so it could operate for that length with even no income?

Steve, the benefit is no worries, it also reduces the taxable income for the given year. Stuff happens as does accidents, if I were to get hurt the company would keep going but I do not want to have to put any more of my own cash in so this takes care of any loan payments.

As for the 6 months, I realize that most companies can not do this but ye3 if you can you should, at least three months. You should also put a portion of every piece of work away, say 10% to start, perhaps have your better half control this seperate fund if you find yourself spending it, rainy days happen, growth is required, this fund will ensure you do not have to borrow. Personally I put 50% of net profits away for future growth.