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Construction Programs & Results Inc

We Like to See The Good Guys Win!

Setting Funds Aside

by Michael Stone

For many years we've talked about the importance of having an Operating Capital Reserve Account (O.C.R.A.). I want to talk about it again today because so many business owners don't have one.Setting Funds Aside

An O.C.R.A. is a savings account, or if you prefer, a CYA account. It keeps you out of financial trouble when bad things happen. It eliminates the need for a line of credit, loans against your home, or borrowing from friends, relatives or loan sharks. It stops you from having to sell tools or equipment you need in order to make payroll. It gives you the freedom to walk away from bad jobs. Most importantly, it keeps your family free from financial worries, which helps you sleep better.

When things are good, we don't want to think about the bad times. But times like now are when it's easiest to get an O.C.R.A. established. Once you've set one up and are regularly contributing, you'll appreciate the freedom of knowing you can pay your bills if a job goes south, and you won't have to take those questionable jobs in order to stay in business. If you haven't established an O.C.R.A. or aren't contributing to it, it will be tougher to survive when your business hits a bump, or if the economy goes into a tailspin.

An O.C.R.A. is there for your business to use. You can't be denied the money when you need it, and you don't have to pay it back.

We're approaching the end of the year, which means it's time to begin reviewing what happened this year and planning for next year. We discuss the planning process in these two articles, Planning Part 1 and Planning Part 2. That makes this the ideal time of year to establish an O.C.R.A. if you haven't already. If you already have one, review your O.C.R.A. contribution to see if it needs to be revised.

Chapter 5 of Markup and Profit Revisited is titled "Avoid Financial Pitfalls". That's where we outline how much you should set aside in an O.C.R.A., and how to go about doing it. Create your O.C.R.A. by taking 1% right off the top of every check you receive. Once you can set aside 1% without feeling too much pain, increase the amount. Make it 1.5%, then 2%, all the way up to 4% of every check. You're slowly building your own line of credit to tide you over when times get tough.

Set a goal for your O.C.R.A. by looking at your average monthly expense needs. How much money will you need in an average month to survive if you don't make any sales?

If you're a specialty contractor, you'll want enough for at least five months, because that's the normal job cycle for a specialty contractor. If you're a remodeling contractor, you'll want at least seven months. If your job cycles are longer or shorter, adjust accordingly. Your job cycle is the average time it takes from the day you advertise until the day you deposit the last check on a job generated by that advertising. We talk about job cycles and how to calculate yours in Chapter 9 of Markup & Profit Revisited.

With an O.C.R.A., when your business runs into an emergency, you have funds in reserve to handle the emergency. It doesn't cost you a penny; it's free money that you're borrowing from yourself.

Setting up and maintaining an O.C.R.A. requires discipline. You'll be tempted to spend the money on equipment you don't really need, or on a vacation that will be forgotten. You'll probably have to pay taxes on the funds the year they're first set aside; that's part of the cost of doing business. After the taxes are paid, it's all yours to use when needed.

During the last downturn, our coaching clients who'd set up an O.C.R.A. sailed through. They were able to keep their bills paid and stay in business.

When the construction economy goes in the toilet, as it always does on a cyclical basis, your personal economy will suffer as well unless you're prepared. Now is the time to prepare, because the easiest time to setup and fund your O.C.R.A. is when the economy is strong.

Your choice: You can pay interest on a line of credit, or you can earn interest on an O.C.R.A.. You can gamble on whether you'll be allowed to borrow money, or you can use your own funds that can't be denied. Once you're in the habit of setting aside these funds, you won't even miss them. Get started while the going is good.

 

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