My company had its most difficult year ever in 2007. The
previous five years had been great: As a real estate developer
and general contractor, I'd completed several successful
development projects and worked with many repeat contracting
customers. Business was so good, in fact, that I became less
cautious than I should have been. I made mistakes —
not saving enough cash, for example, and building a condo
without doing sufficient market research on the location.
By late 2006 business had begun to slow down and I found
myself struggling to pay taxes and meet loan payments. Those
expenses had been manageable in a high revenue period, but now
I found myself in a different world.
Since that point, I've put a great deal of effort into coming
out the other side, and this effort has put my company on solid
ground. And though there will surely be challenges ahead, I am
confident I will survive and prosper.
This article outlines the lessons I learned during that
struggle. It begins with the practices every business should
have in place to prepare for tough times. I should have
implemented them, I realize now, when times were good.
The article also describes the steps I took to recover. The
challenges I faced are ones that could confront any small
business; if you're already facing a slowdown, these steps
could be the key to your survival.
Lean and Mean
A healthy business is resilient enough to respond quickly to
market downturns and other threats. One of the major lessons
I've learned over the last couple of years is that to stay
resilient you have to run a company as if it were always in
crisis: Keep expenses to a bare minimum and build up cash
reserves and borrowing power.
Limiting expenses is the most important thing a company can do
to prepare for challenges. That means limiting purchases and
payroll to what's needed and not committing to monthly payments
— for trucks, equipment, or space — that can
be sustained only when revenues are strong.
Ignoring this advice was one of my biggest mistakes. When
business was good I invested in equipment I could easily have
done without — new vehicles, for instance, and a new
set of staging I hardly ever used and could have rented or
I'm not saying that you should never buy a new truck
— merely that you should do so only when your volume
and margins are growing. To determine whether they are, you
need to spend time realistically projecting future work volume
and cash flow.
As for wages, I know a company that paid lead carpenters top
dollar when they started working. This was helpful for
recruiting experienced staff, but when revenues fell the
company was committed to a high payroll. I pay my carpenters a
lower starting salary than they can get elsewhere, but I
compensate by offering regular raises, as well as bonuses based
on the company's profitability. I am honest with my employees
about our profits, so they understand the reasons for what they
do and don't get.
Cash and Credit
Countless business articles recommend keeping six months'
operating expenses on hand. This is like the advice to drink
eight glasses of water every day: How many of us really do
that? I certainly didn't. In the years leading up to my
slowdown, I plowed most of my company earnings back into real
estate investments. Big mistake! When my condo project didn't
sell, my lack of cash reserves made it difficult to pay the
mortgage on that property.
The fact is that a healthy cash reserve is a must if you want
to be a survivor. When revenues fall, the reserve will pay your
bills during the time it takes to adjust. At a minimum, you
need enough cash to pay the basic expenses of staying in
business: office rent, truck payments, workers' comp, liability
insurance, phone, computer, and so forth. Exactly how many
months' reserves you need is a figure you should discuss with
your accountant and banker.
It takes discipline to put money aside to build up reserves,
but it can be done. I had no cash at the beginning of 2007, but
a year later I had managed to put three or four months'
expenses in the bank. One way to make the process easier is to
set up an automatic weekly or monthly money transfer from your
business checking account to a CD or money market
Borrowing power is as important as cash, since most
contractors fall back on credit when money is tight. The catch
is that banks will typically lend only when you are in a strong
or stable situation, with a track record in business, good cash
flow, and some cash on hand (in other words, when you don't
really need the money).
I suggest establishing a business line of credit (LOC) with
your bank or credit union. A business LOC is similar to a home
equity LOC in that it's secured by real estate, whether your
home or an investment property you own. You can borrow from it
at any time by writing a check. The minimum monthly payment is
interest-only, though the banks I know usually require that you
pay it down to a zero balance for a period of 30 days each
You should maximize the amount you can borrow and then be
disciplined enough to use only what you need. If you are
uncomfortable with this approach, establish the line of credit
at a level you are comfortable with, and grow the amount over
When Things Get Tough
A lesson I learned years ago when I worked as a sales manager
for another company is that you can rarely sell yourself out of
a problem. Instead, you need to get your business into shape
and grow from there — which means identifying hard
decisions and making them quickly. What follows are the actions
I took to get my business back on its feet. No single one saved
the day; success depended on a combination of all of them. If
your business is in trouble, you need to decide which ones are
right for your situation.
The necessary steps include those that require cooperation
from business partners — suppliers, subcontractors,
insurance companies, and banks — and those you can
implement yourself. For many people, approaching a partner is
difficult; they equate business struggles with failure and
inadequacy. If you share this perception, you need to get over
it — now. You are not the first contractor to struggle
and you won't be the last, but if you start avoiding your
business partners, your business is toast. The only way to
survive and prosper is by taking action.
Suppliers and subs. Determine who needs to be paid and when.
Then meet with all vendors and subs and present them with a
plan for how much you can afford to pay against any old
invoices, and how and when you will bring your accounts
up-to-date. You don't need to reveal all the details of your
business, but in some respects you are asking them to partner
up with you.
I first saw this in action as a kid. My parents owned a retail
store that extended credit to customers who sometimes were not
able to pay as planned. My parents always said that as long as
the customer paid something and communicated with them about
the problem, they could work something out.
This still works today. For example, I have a contractor
friend who was struggling to stay afloat four years ago, so he
went to his supplier and worked out a payment plan. He is now
back up and running and buying exclusively from that vendor.
The supplier judged him to be creditworthy and realized that
working with him was a wise investment.
It's very important that you commit to only what you know you
can pay. If you can't make a commitment, be honest about when
you can start paying. Without this kind of realism and honesty,
you won't be able to emerge from a bad time with your financial
Review your insurance. Assuming that you have built a good
relationship with your insurance agents, go meet with them.
Review your deductibles and decide if any are too high or too
low. Your agent can also contact the insurance carriers to
discuss payment options, or can change your quarterly or
semiannual payment to smaller monthly ones.
In some cases you may have to contact the carrier directly. I
called one insurer to whom I owed several thousand dollars,
told the representative what my situation was, and offered a
payment plan. Her response was one of surprise: "No one calls
us to resolve these problems." She promised to run it past her
supervisor, who in less than five minutes called back to agree
to my offer and to thank me for calling.
Renegotiate bank loans. Most people are reluctant to approach
a bank, but in fact everything is negotiable, even loans.
Monthly payments on mortgages and lines of credit can be
postponed, and interest rates can be reviewed. However, you
will need to have a good relationship with your bank and be
willing to open your books to its officers.
The bank doesn't have to make any changes, but — like
the supplier and insurer — it has an investment in
your success. I suggest making your bank officer part of your
business team by regularly meeting with him or her to look at
your cash, cash flow, and debt ratios. This will make the bank
more willing to negotiate.
Sometimes you need to be persistent. I didn't have any luck
renegotiating with my bank until I changed loan officers. It
was worth the effort; my loan payments were reduced. And the
bank is still making plenty of money from me.
Review labor and service costs. Take a hard look at the size
and structure of your payroll. Do you really need a helper at
each site? What services can you live without until things turn
around? I unfortunately had to lay off two employees, and I
cancelled all but one cellphone, as well as various other
Sell assets. This was one of the most painful steps I had to
take. I had spent six years buying and holding properties, and
I saw those properties as tangible signs of my success. But in
a crisis, the sale of a property — even one that is
yielding positive cash flow — can bring in needed
When I met with one of my advisors, we listed all of my
properties on a dry-erase board, along with the cash flow I
received from each. Based on that discussion, he advised that I
sell three properties, including my home. After I got up off
the floor, I put all three properties on the market. Three
months after that meeting I had a sales contract on one
property, and had rented my house (for twice the payment) and
moved into one of my unsold condos.
Consider other types of work. This is common sense. When real
estate stopped selling, I stepped back from property
development into general contracting. I also stepped up a side
business doing property inspections.
If you're a general contractor who used to do a lot of siding,
you might have to go back to subbing out siding jobs from other
contractors. My plumber has started taking work from a large
developer who doesn't pay very well — which tells me
the plumber's business is slowing down considerably.
You do what you have to do to survive.
One last piece of advice: A fatal shortcoming among many small
business owners is that they have few — if any
— knowledgeable people to talk with about the nuts and
bolts of their businesses. Don't be one of them. If you've read
this far, you've noticed that I'm willing to talk with people
about my business. That willingness was absolutely crucial to
my ability to recover.
Make an effort to find people you can discuss business issues
with on a regular basis, regardless of how well your company is
doing. Some of the best advisors are successful people who
struggled in the past. One of my friends had two companies fail
before going on to start a very successful Internet business.
Another friend went bankrupt in the mid-80s and is now running
a successful construction company. I talk with both regularly
about business issues and find those discussions
Yet another friend referred me to a former bank president. I
had only one conversation with this man, but he gave me some
great information on what banks care about and how to deal with
If you don't know where to start, check with your local NAHB
or NARI chapter, or call other builders you know. Ask your
banker, your accountant, or the local small-business
development center for referrals. Once you start asking, things
will start to happen.
As an added incentive, remember that the process of bouncing
ideas off other people helps you establish relationships and
create opportunities you didn't have before. It's something you
can't afford not to do.Jim Cameron is a real estate investor and
general contractor based in East Fairfield, Vt.