Articles Written by Charles Vander Kooi

Learn money managing discipline

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. This is true even in times when the economy is thriving. Here are some concepts about, and methods to use, to be disciplined with money.

1. Establish accountability
I know I've written about accountability in a past column, but these principles are too important to money discipline not to include them here. 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 company's money. As soon as they see money in the checkbook, whether it be a personal checkbook or a company checkbook, they spend it.

Does the description above sound like you or an employee who has access to your company's coffers? Do everyone a favor. Set up a system of accountability that will keep you, the employee, and the company from being victimized. You can do this in several ways:

Turn the checkbook over to someone else so that you or they must go to that person for a check. The big spender can still sign these checks if necessary.
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.
Set up a committee of level-headed people who will advise the big spender about expenditures that exceed a specific amount.

Some of these things may sound embarrassing to you, but they are less embarrassing than bankruptcy.

2a. Down-and-dirty accounting
A second thing everyone needs to understand and do is down-and-dirty accounting. This means that you must acquire the ability to determine quickly where you stand financially. It is important to get monthly profit-and-loss statements, but many times monthly statements don't reach you in time to make decisions about spending money.

There may be money in the checkbook that looks like profit. But when you consider all the upcoming bills, there's no profit for spending. Contractors often receive money in large lump sums for their work. But rather than look at the bills that are coming due, some contractors look at the money that they have in the checkbook, and do not apply any down-and-dirty accounting to that money. So they spend it - and find themselves in trouble down the road.

2b. Getting a feel for where you stand
Many contractors keep approximate financial records in their desk just to maintain a daily feel as to where the company is financially. Accountants must submit an excellent bookkeeping record to you on a monthly basis, but you should also keep this personal record in order to keep things in check.

You should do this down-and-dirty accounting every month after receiving a financial statement. Remember, just because a financial statement suggests that you have made a profit, it does not necessarily mean you have actually made a profit.

You must always question each statement's results until you are 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-billing and under-billing" meeting. During this time, re-examine every job and every account to make sure that the financial statement reflects reality.

2c. False financial security
Let's look at what can happen if you don't keep a personal financial record. If a financial statement shows a larger-than-normal profit, that is the first sign that something could be wrong. If you don't heed this warning, you start to spend the money. After a year, your insurance company audits you and hands you a bill for almost $40,000 in additional insurance premiums for Workers' Compensation liability based on your payroll.

Initially, the insurance company quoted you - and you paid - a premium on an amount based on a payroll that has since doubled. You automatically collected the additional money through your labor burden percentage. But it didn't show up as an expense in your financial statements because the insurance company did not detect the increase until they audited the books at the end of the year. So the extra money showed up as a profit and you spent it.

2d. A method to see where you stand
There is a method that can prevent these kinds of things from happening. Set up separate bank accounts for all items from which you receive payment on a daily or monthly basis, and that you make payments on quarterly or even annually. Some items that might fit in that category are certain taxes, insurance of all kinds, equipment maintenance expenses, licenses, yearly fees, dues, etc.

On a monthly basis, write checks for each of those items in the amounts you charge clients for them. Deposit those checks in the separate savings account designated for each item. Monthly profit-and-loss financial statements will now include these costs because you wrote a check for them. Also, when the bill finally arrives, you will have the money in an account to pay for it.

3. Bill like a tiger
A third item about money discipline can almost go without saying, except it is too important not to mention. You should bill every chance you get, and then be a regular "tiger" about collecting 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 collection policy.

Very few days should go by without bills of some sort going out and calls about receivables being made. 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 that the time when they will pay your company will come sooner too.

4. Take advantage of discounts
A fourth item about money discipline involves a money-making principle. You should take advantage of every discount of 2% or more without fail, and of 1% if you are able. You can borrow money to take advantage of a 2% discount on supplies, and still save more than the interest charged on the borrowed money.

At 1% it becomes almost breakeven. But, if you have the money, getting the discount will pay you a better return than having the money in a savings account.

5. Conserve cash
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 to be debt free.

That is a good position to take if you are so well healed that you can do it. However, since almost everyone is not in that position, a better position to take is one that maintains a balance between debt and cash in CDs, or in money market accounts, or as cash reserve against the payments of debt.

This business is so volatile that everyone should keep a cash reserve for an emergency situation to carry you through a potential downturn in your workload.

While it is true that using all of your cash to pay for equipment or other purchases means that you will not have payments on a monthly basis, it also means you will not have the cash to survive if things take a turn for the worse.

At that point, you will be at the mercy of a lending institution to loan you money in bad circumstances. If you finance a part of the equipment and keep a cash reserve, you can make the payments, and keep going during a bad time without depending on a lending institution.

Remember, your long-term success does not depend solely on your ability to make money, but also on your ability to handle that money well.