After a lot of hard work and so many hours you’ve lost count, your contracting company is finally turning a profit. You’ve built up a decent base of business and you’ve even been able to hire a few staff to help out. But now you’re facing another problem that crops up sooner or later in every company, no matter how big or small, namely when is the time right to invest some of that hard-earned money back into the business?

While there’s no easy answer, there are some underlying factors that plumbing, HVAC, water treatment and other contractors should consider when trying to strike the right balance between saving money and investing in improvements designed to make their company more competitive.

Perhaps foremost among these factors is the condition of the business itself. In terms of staffing, is your team sufficiently busy or stretched thin? Are you losing out on potential sales opportunities because you simply don’t have enough people to handle the work? Is the quality of your work going down — and the number of customer complaints going up — because your people are overworked?

What about your equipment and technology? Is it enabling your team to work efficiently and maintain productivity or is it outdated and inhibiting your ability to compete for more work or bigger projects? Are you doing things manually that could be better handled by a tech upgrade? Are your competitors winning more business because they can tout their use of cutting-edge equipment that saves them time and their customers money?

Speaking of competition, what’s it like in your area? Are you the only game in town or facing a crowded field? Is there a growing market for the services you offer? Are competing contractors generally profitable or routinely discounting their rates just to land more business?

Depending on your answers to these questions, you may find yourself facing the reality that the time is right to put some of that hard-earned money back into the business. That could take many forms, from hiring more staff or providing additional training for the staff already on board to purchasing new equipment or technology to increasing your spend on marketing or advertising. None of that can or should happen, however, until you first take stock of your business, beginning with its financial posture.

While your business may be turning a profit, it is essential to fully understand how that profit is working for you. Does the company have sufficient cash on hand to cover all of its normal operating expenses (payroll, inventory costs, office and warehouse space, etc.) and still have funds left over to invest in a longer-term savings vehicle, such as a money market account or IRA?

To get a handle on a company’s financial health, contractors should start by calculating their ability to meet short-term financial obligations with their most liquid assets. It is also important to determine how efficiently the business can free up cash linked to inventory. This can be done by dividing the average inventory for a given time period by the corresponding cost of goods sold over that same period. Finally, the contractor can evaluate how effectively money is being collected by dividing credit sales by the average accounts receivable over a given time frame.

With this information in hand, contractors will be in a significantly better position to determine whether the company is in a good position to use its own capital to invest in itself or has the kind of financial track record to satisfy a bank or credit union’s lending criteria.

While your business may be turning a profit, it is essential to fully understand how that profit is working for you. Does the company have sufficient cash on hand to cover all of its normal operating expenses (payroll, inventory costs, office and warehouse space, etc.) and still have funds left over to invest in a longer-term savings vehicle, such as a money market account or IRA?

Before taking action, though, there are two other factors contractors should consider. First, as with any investment, it always makes sense to evaluate the pros and cons of taking action. What will adding more staff or purchasing new equipment actually do for the business? Will it save time, streamline processes, and make the company more competitive? Understanding what the benefits will enable the company to do — and conversely, what the downside will be if you decide not to move forward — will help to clarify whether or not the potential investment represents a good fit at this time.

While weighing out the positives and negatives may sound fairly straightforward, it’s important to recognize that such decisions require complete objectivity. Is that new hire or equipment purchase really a necessity or something that simply would be nice to have? Don’t let emotions influence your considerations. Taking that step back and objectively evaluating why you really want or need a proposed purchase and what the impact will be on your business if you decide not to move forward can make this an easier decision.

It is equally important for contractors to plan for the unexpected before making a new hire or major purchase. Will making such an investment leave the business cash-poor? Is there a cushion if the company loses a major customer or the economy falters, causing collections to slow down?

While the rule of thumb is to set aside 3-6 months of operating expenses to manage for the unexpected, the right amount actually varies from business to business. Given that, it’s a good idea to determine what kinds of events realistically could harm the company and then assign a dollar value to each event. Regardless of what that cash set aside is, contractors are well-advised to keep reserves in a separate account that can be easily accessed should the unthinkable occur.

Bottom line, investing in your contracting business should never be an impulse buy. Plumbing, HVAC, water treatment and other contractors (and other business owners, for that matter) should always take the time to objectively evaluate where their business stands financially, as well as in relation to its competition and the prevailing market conditions. Moving slowly but deliberately, objectively evaluating the potential positive and negative impacts of making (or not making) a purchase, and preparing for the unexpected ultimately can help contractors to make an informed decision whenever it comes to investing in themselves.