In December 2012, housing starts rose 12.1% to a seasonally adjusted annual rate of 954,000, according to the Commerce Department, which was the highest level since July 2008.
Compared with a year ago, new home construction was up 36.9%. For all of 2012, 780,000 new homes were started, but when you consider that homebuilders have started an average of 1.5 million new homes per year since 1959, housing starts are still substantially below historical levels, leaving a lot of pent-up demand.
Many of the lumberyards I have researched have experienced a net loss of working capital since the housing crash. So it’s timely for building supply businesses to ask themselves where the capital is going to come from to fund the additional inventory, accounts receivable and equipment necessary to support the growth that virtually everyone is expecting?
Five years of losing money (if that is the case in your business) is going to make it especially difficult for businesses in our industry to take advantage of the housing increase that many of the experts believe is just around the corner.
1. If you haven’t already, begin building a relationship with a second bank.
Use your payroll account to begin doing business with a second bank. Do some research first to make sure the bank you choose is willing to give your company a (hopefully unsecured) line of credit. Having a relationship with another bank will give you some much needed leverage should your primary bank limit the capital they are willing to lend.
2. Research what financial services companies like Portland-based BlueTarp Financial (BlueTarp.com) have to offer.
Through my own research and the collaboration of several of my industry colleagues, we concluded that the approximate cost of credit ranges from a low of 3.5% to a high of 5.0% of sales. Smaller companies will range on the high side and larger companies will range on the low side of this estimate.
This range takes into consideration bad debt expense, cost of capital, cost of credit managers and credit clerks, missed opportunities as a result of conservative credit policies, legal costs, collection costs, postage, the owner’s time spent interceding in credit issues, etc.
Financial services companies like BlueTarp provide dealers with predictable cash flow and eliminate credit risk for a fee that typically ranges from 1.7% to 3%. They manage the credit, funding, billing, collections and customer service needs that dealers’ in-house programs currently manage. And they lend without the hooks that banks often place on your business.
3. I believe it’s wise to do some advance calculations to estimate how close your available capital will come to meeting your needs.
A simple cash flow analysis can come pretty close to revealing how much additional capital your business will require in relation to it’s growth.
Assume a $15 million lumberyard grows 20% in sales in 2013 over 2012. Also assume that the business is generating a 23% gross margin, achieves eight inventory turns and 45 collection days. To estimate how much capital will be required to fund the additional inventory and A/R for sales growth of 20%, I use a simple cash flow analysis like the one below:
To generate this amount of cash internally, this business would have to earn approximately 7.3% before income taxes. This calculation doesn’t consider additional equipment or expansion of the physical plant.
So my question is: Do you have a plan to raise the capital your company will need to take advantage of a strong housing market when it returns?
About the Author
Author Bill Lee has nearly 40 years of experience in the construction supply industry. A seminar leader and consultant, he is the author of two books: Gross Margin and 30 Ways Managers Shoot Themselves in the Foot. You can reach Bill at BLee3Paris@aol.com, www.BillLeeOnLine.com, or 800.277.7888.Follow on Twitter More Content by Bill Lee