May 2004
BY JAMES S. ANCHIN, CPA
Construction company owners are often so involved in the daily operation of their companies that they don't take the time to address long-range planning. Until, that is, a bank or surety wants to see a business plan as a condition of obtaining financing or bonding.
This requirement may send a contractor into a whirlwind, racing through the company and the calendar, trying to put on paper what has been, up until this point, all in his or her head! Effective business planning however, takes an investment of time. There's much truth in the adage, "If you've failed to plan, you can plan to fail." Industry experts agree that time spent planning is time well spent. A hasty effort at business planning rarely ends up in getting an approved loan or bonding line.
Besides needing a business plan for soliciting lenders or sureties, the process of planning is an important part of business growth and development. This valuable activity forces both owners and management to research, analyze and address issues for the present and the future in areas like technology, personnel, quality assurance, budgeting and tax planning. The business plan should be seen as the vision of a company and an examination of the avenues to be taken to see that vision through, rather than simply reacting to a financing requirement.
Putting together the plan that will best profile and sell your company's strengths starts with a working knowledge of who will be reading it and making the decisions. Think about what credit grantors are looking for:
Targeted Volume Ð What is your aim? What do you anticipate the growth rate of the business to be? Over what period of time? A $5 million contractor cannot expect to become a $50 million contractor overnight. Is five years realistic? Ten years?
Types of projects Ð What kind of work are you seeking to take on? Will you be branching out into related areas? For example, a sewer contractor may be looking to get involved in roadwork. Will the projects be of a short-term nature, or last a number of years?
Talent resources Ð What type of experience and expertise makes up your team? Do you have the necessary technical people, such as engineers and draftsmen? How experienced are your core field personnel, especially in the project areas you are targeting? Is a pool of qualified laborers available?
Do you have qualified financial people to record and monitor job costs and collections, report job progress to management and deal with banks and bonding companies? A CPA experienced in this industry should be an integral part of this team.
Market conditions Ð Here you need to look ahead at your market three-to-five years from now. What is the outlook for your industry during the period of your plan? If you rely on public work, are federal, state and local governments releasing work? If these governments face budget constraints, will future work be forthcoming? How current are the various government agencies with their payments?
Management's Capital Commitment Ð The bank doesn't want to be the only one taking a risk, so what financial commitment has management made into the business?
Financing needs Ð Basically, you need to specify the type and amount of financing needed, its purpose and how you plan to repay it. How large a bonding line will you need? Will you need to finance the purchase of heavy equipment? Do you need funds to carry you through the early stages of a long-term project? Cash flow projection is crucial.
The process of business planning is as important as the plan itself. The planning shouldn't begin without a clear picture of the objective. Define your goals. Then gather the information needed for your plan. Think about the data that credit grantors will be looking for and your sources for obtaining such information. The planning process is a fluid one, constantly changing as information is gathered. Based on data accumulated, goals may have to be modified, added or eliminated.
There are never enough hours in a day for the owner of a construction business. However, a commitment of time must be made for the planning process. An individual must be designated as the planning manager; this may end up being the owner. A reasonable timetable should be established for its completion.
Don't overlook the value of your CPA in this process. His or her knowledge and experience in the industry and in dealing with credit grantors can speed up the information-gathering operation and guide the creation of the final document.
Once your plan is in place, you are ready to distinctly chart your course to a more profitable future.
About the author: Mr. Anchin is a managing partner of Anchin, Block & Anchin, LLP, a regional certified public accounting firm with offices in New York City and Westchester, that specializes in meeting the needs of contractors in the tri-state area. He can be reached at (212) 840-3456 or by e-mail at: james.anchin@ anchin.com