In most every business, there seems this constant push to want to grow and get bigger. There is a point you can reach though where you go from growth to over extending yourself. You may not notice when it is happening. You also may not know the downsides to doing it. Here is a great discussion on it from the Gopher Lawn Care Business Forum that looks deeper into this topic and sheds light on a great topic.
One lawn care business owner wrote “the economic cycle will go up and down over time. At times the economy will speed up with more spending and then there are times when it will slow down.
Some can argue that when the economy is really rip roaring, that it is a good time to go into debt so you can take advantage of all the free flowing money and profit more. What does this mean for the green industry? Well it’s possible you might find yourself, during good economic times, swamped with customers. There is a lot less competition because more people are employed and not looking to start their own business. They have money to spend on lawn care and you think this is great.
You go out and finance a new truck or trailer or larger mower. Maybe you even take on a bunch of crews. You start leveraging your assets and may find you use your home as collateral on a loan to pay for all this stuff.
Then you find everything is going great and you are making all this money. Next thing you know it, the economy slows down and you don’t have as many customers. So you lay off a crew. You start to have equipment sit idle. Next thing you know it you don’t have the cash flow to pay the loans on all this added equipment. You didn’t save any money. If the economy slows for too long, you just might lose everything because you used everything you had as collateral to grow. You over extended yourself and this is how things collapse.
On the other hand, if you are able to save cash and pay for things as you go, you may not grow as fast as those who leverage their assets, but you will have a stronger foundation to grow from.
When the economy slows down, you will have minimal bills, you will own your business assets and you be more likely able weather the storm. Another great part about that is when the economy starts to rev up, you will be in a great position to take advantage of all the new customers and you will be able to scale up faster than others who would just be starting up.
Is there an ideal way to go though? Is there an ideal path? Maybe a mixture of both? What’s your thoughts on this?”
A second lawn care business owner said “I feel it’s a bit of a balancing act. I wish I had a crystal ball some times to see into the future and know what I needed to do. Right now, we could still add a pile of lawn care equipment and staff to catch up but it’s time to put the brakes on unless an opportunity comes along.
When I hit three weeks of landscaping work ahead of us I start looking at possibly adding equipment/staff or if I get a really big contract and the profit would cover 40% of the equipment cost then I buy it.
I have taken a couple of zero percent loans from the local equipment dealer. What I did though is write them a check for twelve months payments in advance. They hadn’t had this happen before but figured out how to put it through their software. Any purchase under $5,000 is paid by check.
I keep six months of cash in the company account to cover everything just in case but I have very little debt anyhow.
The benefit of writing the dealer a check for twelve months is that there are no worries. It also reduces the taxable income for the given year. Stuff happens as do accidents. If I were to get hurt, the company would keep going but I do not want to have to put any more of my own cash in so this takes care of any loan payments.
As for the six months of savings, I realize that most companies can not do this butÂ if you can you should. At the very least have three months saved up. You should also put a portion of every piece of work away, say 10% to start, in a separate fund for rainy days. When growth is required, this fund will ensure you do not have to borrow to do that. Personally I put 50% of net profits away for future growth.”
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