Drilling Contractors, How Do You Spend In Rough Times?
Have you ever heard the phrase “spending against the wind”? It comes from the field of economics, John Maynard Keynes in particular. The basic idea? When times are hard, spend to grow. He applied this to the government, but I see its uses in everyday business.
Let me back up a second. In addition to my role here at National Driller, I run a small business. (This isn’t news to many of you. I’ve written on it here before.) This year has roughened it up a bit. I won’t bore readers with details. Suffice it to say, 2019 came with a whole pile of expensive challenges to the business.
We made the decision to spend against the wind in an effort to earn our way out. We invested in our business, even though it hurt a bit. We took on more debt. But the investments and financing we made allowed us to expand here, command a higher price there. In the end, we created more value in the business than new debt we incurred, so our cash flow climbed.
The ceiling for our business got a little higher.
Think about it in terms of a drilling contracting firm. Many types of drilling have business cycles. Geothermal had a moment. Geotech seems to ride high. Water well can prove profitable, particularly operators who can bid higher-cap jobs. But the peaks and troughs don’t usually line up. What to do?
Let’s say you specialize in geotech. Currently, construction hums along pretty well. Geotech work flows from that, as construction demand fuels demand for site investigation and characterization. In this case, the winds in your industry blow toward spending. To spend against the wind, you would hang onto your investment dollars. Hoard a bit (or at least hold to modest growth). Pay down debt to increase cash flow.
Next year, goetech softens. What to do? To spend against the wind, you would take the plunge and buy that bigger rig. Buy equipment that lets you bid specialty (that is, higher-return) jobs. Take on debt to increase cash flow.
Investing while things look grim allows you to better weather the next storm. You expand services or set yourself up to charge higher prices. Either brings more revenue. Hanging on to money in boom times allows you to lower debt service and solidify a business’s foundation through reserves. Either helps guard against the next downturn.
This is one tactic. It worked for me this year. We spent money. Yes, it created more debt. But the higher revenue more than offset the higher debt. Now that revenue has hit a new high, we can hang on to more cash then start the cycle over again — raising the ceiling in steps.
It’s a good tactic to think about as you wrestle with your own small business, particularly amid nervous whispers that the United States’s unprecedented growth period surely has to end sometime.
Now is a good time to remind readers that I am neither an accountant nor an economist by training. I am a magazine editor with going on six years of experience running and building a side-hustle business. Consult an accountant before making important financial decisions that affect your business and your livelihood.
What do you think? How do you approach spending in your business? Is it haphazard and reactionary? Have you mastered some financial tactics you could share? Let me know. Send an email to firstname.lastname@example.org.
Stay safe out there, drillers.