Bill Lee has nearly 40 years of experience in the construction supply industry. He writes here about being ready for growth and the best ways to manage growth and risk.

1. BILL LEE SALES AND MARGINS
Are You Ready for
Growth?
I
n December 2012, housing starts 2. Research what financial services and A/R for sales growth of 20%, I use
rose 12.1% to a seasonally adjusted companies like Charlotte-based a simple cash flow analysis like the one
annual rate of 954,000, according to BlueTarp Financial (BlueTarp.com) below:
the Commerce Department, which was have to offer.
+ Sales $ 15 million
the highest level since July 2008. Through my own research and the col-
Compared with a year ago, new laboration of several of my industry col- Less COGS $ 11.55 million
home construction was up 36.9%. For leagues, we concluded that the approxi- = Gross Profit (23%) $ 3.45 million
all of 2012, 780,000 new homes were mate cost of credit ranges from a low of Inventory (8 turns) $ 1,444,000
started, but when you consider that 3.5% to a high of 5.0% of sales. Smaller
A/R (45 Coll. Days) $ 1,850,000
homebuilders have started an average companies will range on the high side
of 1.5 million new homes per year since and larger companies will range on the $ 3,294,000
1959, housing starts are still substan- low side of this estimate.
X 20% Growth
tially below historical levels, leaving a This range takes into consideration
lot of pent-up demand. bad debt expense, cost of capital, cost $658,800 (Additional Cash Required)
Many of the lumberyards I have re- of credit managers and credit clerks,
searched have experienced a net loss missed opportunities as a result of con- To generate this amount of cash in-
of working capital since the housing servative credit policies, legal costs, col- ternally, this business would have to
crash. So it’s timely for building supply lection costs, postage, the owner’s time earn approximately 7.3% before income
businesses to ask themselves where the spent interceding in credit issues, etc. taxes. This calculation doesn’t consider
capital is going to come from to fund Financial services companies like additional equipment or expansion of the
the additional inventory, accounts re- BlueTarp provide dealers with predict- physical plant.
ceivable and equipment necessary to able cash flow and eliminate credit risk So my question is: Do you have a
support the growth that virtually every- for a fee that typically ranges from 1.7% plan to raise the capital your company
one is expecting? to 3%. They manage the credit, funding, will need to take advantage of a strong
Five years of losing money (if that billing, collections and customer service housing market when it returns? ■
is the case in your business) is going needs that dealers’ in-house programs
to make it especially difficult for busi- currently manage. And they lend with- Bill Lee has nearly 40 years of experience in
nesses in our industry to take advan- out the hooks that banks often place on the construction supply industry. A seminar
tage of the housing increase that many your business. leader and consultant, he is the author
of the experts believe is just around the of two books: Gross Margin and 30 Ways
corner. 3. I believe it’s wise to do some Managers Shoot Themselves in the Foot.
advance calculations to estimate You can reach Bill at BLee3Paris@aol.com,
1. If you haven’t already, begin how close your available capital will www.BillLeeOnLine.com, or 800.277.7888.
building a relationship with a come to meeting your needs.
second bank. A simple cash flow analysis can come
Use your payroll account to begin do- pretty close to revealing how much ad-
ing business with a second bank. Do ditional capital your business will re-
some research first to make sure the quire in relation to it’s growth.
bank you choose is willing to give your Assume a $15 million lumberyard
company a (hopefully unsecured) line grows 20% in sales in 2013 over 2012.
of credit. Having a relationship with Also assume that the business is gener-
another bank will give you some much ating a 23% gross margin, achieves eight
needed leverage should your primary inventory turns and 45 collection days.
bank limit the capital they are willing To estimate how much capital will be re-
to lend. quired to fund the additional inventory
12 LBM Journal / March 2013 / LBMJournal.com