Masonry Magazine April 1962 Page. 6
Financing for the Mason Contractor
(Continued from preceding page)
per cent a month, and if you don't take that discount, you are paying forty-eight per cent interest a year. Or if it is six per eent, payable in thirty days, then you are paying seventy-two per cent. And you also know, when you get a little bit slow, your chiseling power decreases with the people from whom you are buying. And that's interest, gentlemen. That's interest.
So your fixed assets must be in the proper relationship to your net worth. And your long term financing must be just as carefully arranged as your short term financing, if you are to keep your current and fixed assets in the proper relationship. And again, if we have time in the question and answer period, I would be glad to answer specific questions on this subject.
One question I would like to answer in advance is this question of leased equipment. Now, don't let anybody fool you on this leased equipment gimmick. Leasing equipment is borrowing money. It is financing equipment on a long term basis. You know, with all the items and with all the brochures, I haven't seen anybody yet in the leasing business who is willing to lose any money on his leases. And a good banker will ask you how much equipment you are leasing, and what your rental obligations are. And that must appear on your financial statement as a footnote, if nothing else. And I make a prediction that within the next five years, everyone, including the biggest corporations in the United States, will be forced to put their lease obligations on the face of the financial statement. So you are not kidding anybody. Lease obligations are fixed obligations; the part that is due within a year is a current liability, and the part that is due after a year is a long term liability, and it should be set out clearly and stated clearly in your balance sheet.
Now we come to that much-maligned sheet of paper called the profit and loss statement, and this is a very interesting one.
I know a man who built a hundred houses; he had a big contract to build a hundred houses. After he had built the first twenty-five houses, he went out and bought himself a nice big Cadillac. Boy, this was a real wonderful contract he had, and a nice big Cadillac was the least he could do for himself after he saw the profits on that first twenty-five houses. Things progressed very nicely, and he built the next twenty-five houses, and he decided that the poor little woman was just being deprived of the kind of living conditions she ought to have, and so he bought her a nice fifty-thousand-dollar home. Things went so well on the next twenty-five that, necessities having been provided for, it would save a lot of time and energy if he had a twin-engine Beech. And you know, he never has been able to understand to this day how it was possible to lose as much money as he lost on those last twenty-five houses.
Now, of course, you all know exactly what I am driving at. You gentlemen are in the portion of the manufacturing business which is known in the cost parlance as job shops. You are not a manufacturer who sets up a line to manufacture so many washing machines; every job you do is an individual job, and you estimate that job individually. Each has its own peculiarities. Based on that estimate, you bid that job, or you agree to take it in a negotiation. And in order for you to know where you are, you have got to have a cost accounting system, a job cost accounting system. This sounds very, very complicated indeed, and the minute I say the word "system," a lot of people throw up their hands and say, "Well, gee, this is fine if you have been to Harvard Business School, but this is not for me. Systems? Uh-uh."
But the truth of the matter is, you had a system when you estimated the job. I don't care what kind of a system it was, you had a system, even if you got it all out your head, based on your past experience, using your past experience for the system. If you had a sheet of paper on which you were making those estimates, you had a system. And, gentlemen, if you would just take your estimating system and bring it up to date, not only as to take-off of material and labor, but as to time, and then have estimates as to material and labor in a time sequence, and every day, every week and every month run your job against that same estimated time sequence, without kidding yourself, you would have a very simple cost accounting system. And it is absolutely vital to know what your costs are. Some of the biggest losses that we have taken in financing have been with people who have been good customers of ours for many years, who had greatly expanded, and always had been able to pay their bills, and in their expansion, they did not have proper job costs, or they would hire a new foreman, or they would hire a new job superintendent, and they would wake up to find some day and find that they were broke, or they had lost so many thousands and in some cases hundreds of thousands of dollars, which never could have been lost, no matter how hard they had tried, if they had had job costs and a job cost system. Because when they went wrong the first two or three thousand dollars, or, in a small contractor's organization, the first two or three hundred dollars, they would have known something was wrong. They wouldn't have been listening to this chatter: "How's it going, Joe?" "Oh, boy, this job's going fine." None of that kind of stuff. The facts would speak, not Joe, and they could have done something about it before they had lost their money, and before they were too late. It is too late after the job is over to get the history. And this, gentlemen, is absolutely vital in your business. You must have a job cost system. It can be very simple, but it's got to be up-to-date, and it's got to be accurate, and don't kid yourself, you have to have one.
What's more, if you have one, and you keep that record job after job after job, and you close them out when they are done, suppose somebody comes along and offers you a great big contract that you can't finance, and you need the money. Well, you won't have any trouble getting the money! Because there you are; you can show the people that's letting you have the money, whether your banker or your friend, that you can keep track of where you are, and if you get in trouble and who doesn't? you know it soon enough to do something about it.
Next month's issue of Masonry will carry the final part of Mr. Roger's address.
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