Can You Help Me Turn Around My Construction Company?
Service professionals like construction companies can find themselves in the financially tough position of running a lot of projects, but still barely making it financially. Without proper money management strategies and control of their financial planning and cash flow, a general contractor can actually find themselves in financial difficulty with declining profitability and increasing debt.
The following money management strategies illustrate what construction companies and general contractors can do to improve their financial condition and put their business back on the road to wealth and prosperity.
In May 2007, a construction company called me for help. Despite the mortgage loan debacle, the construction industry continued to be strong in Louisiana after Katrina. However, this company was behind on all of their projects, had no operating capital and had accumulated a lot of debt trying to keep the business afloat. They need a FAST turn around in order to survive.
The challenge was to raise income to keep projects moving ahead, placate materials suppliers and subcontract labor, cut runaway expenses, close sales on new projects and deliver the jobs profitably, while reducing a six-figure debt liability as fast as possible.
Cash Flow Management Strategy # 1 – Raising Income & Profitability
Behind the 8-ball, the company’s biggest challenge was to raise income to fund projects to keep them moving forward. Recent project draws from funding banks had been used to keep earlier projects going when money got tight and delivery of projects was coming to a standstill. The income statistic had crashed and personal savings had been drained to try to stay afloat. The debt load had grown to 6 figures.
The Cash Flow Mojo software program was implemented immediately, and a special “Income Planning Drill” was done with the client to determine what the major problems were. As part of the drill, an evaluation of profitability was done on projects that were running in negative profits. An analysis revealed that the company’s construction crew was making costly mistakes that had to be corrected at the company’s expense. To make matters worse, having to correct poorly installed doors and windows often ruined the materials. Replacing costly materials was an extra drain on the company’s bank account.
Many of the highly skilled construction workers had left the state when Katrina hit, never to return, or to return to locations further from the coastal areas. Less qualified workers were hired both to save money and because they were available for work. In the long run this cost the company more because job mistakes had to be corrected at no additional charge to the client.
The worst effect of this was the owner of the construction company was spending all his time doing quality control checks and correcting and re-working jobs, so he had little to no time to work up bids on new contracts. No bids meant no new projects.
The existing construction crew employees were replaced with half the number of new highly skilled crew who could get it right the first time. One of these had experience as a job foreman, and he was given that hat. Despite the increase in the hourly pay for the higher skills, the work was done correctly and faster than before on existing jobs. This freed the owner up to work up bids and close contracts.
In addition a new company policy was implemented, and bids for new jobs were confined to commercial projects which generate more income than residential jobs.
Cash Flow Management Strategy # 2 – Slashing Expenses
With jobs being done right the first time the cost of materials dropped dramatically, but cash was still very tight and materials suppliers who were owed a lot of money were complaining loudly. Money was so tight that one of the weekly financial planning actiohns was to look for things we could sell quickly to raise cash to buy materials. Now, a construction guy would rather die than part with any of his tools or his truck; but here’s what happened.
The owner walked his property and found a riding lawn tractor he could sell. The cash went to pay a supplier. That wasn’t enough for me, so I asked about vehicles. It wasn’t easy, but the sale of the second pickup truck the owner rarely drove was agreed upon and that cash was used to pay suppliers as well. I asked the owner to walk his property and see what else he could find. Sitting in a shed were some very expensive doors and windows he had forgotten about from a project done long before. They happened to be from one of the suppliers who was making threats. The doors and widows were washed clean of accumulated dust, loaded onto a truck and delivered to the supplier for a healthy credit on the bill owed. That was a real win for all of us!
The company had not had good luck with hiring competent bookkeepers, so a good replacement was found and trained on the Cash Flow Mojo software system. She was easily able to input the information into the CFM software program to prepare for my weekly planning meeting with the owner. The accounting chart of accounts was cleaned up and simplified, and the correct entry and reconciliation of credit card statements was implemented.
Just by having the accounting cleaned up and entries corrected allowed the owner to view a correct Profit & Loss statement and review past job profitability. Each line item was reviewed and red-flag items were investigated. The spending faucet was turned off in some areas and turned down in others so available income could be used to maximum advantage to buy time and move current projects forward while income and profitability was being strengthened.
Cash Flow Management Strategy # 3 – Turning the Ship Around
With projects moving forward the owner was freed up to spend his time working up bids and closing new contracts. One area that was a drain on profitability then came to light. Past bids were hurriedly prepared due to lack of time, suppliers were not called for current prices, old pricing was used to make up the bids and the increased prices of materials were missed. Consequently jobs were bid with little profit built in.
A new policy was implemented to get current materials and labor quotes before writing a project bid with clauses to cover unforeseen materials increases. With the owner getting price quotes good for 30 days from suppliers and writing bids that were profitable, the cost of materials was adequately covered and that drain on profitability was stopped cold. The bids on the more lucrative commercial jobs that were closed opened the income faucet and the ship started to turn around.
Cash Flow Management Strategy # 4 – Putting the Owner Back in Financial Control
Using the cash flow management software, funds were allocated to job materials and labor on a weekly basis which kept projects moving. Funds were also allocated to past due bills while keeping up with current operating expenses. That kept suppliers happy. A set aside account for cash reserves was funded weekly to cover unexpected emergencies.
The company owner had plenty of time to work up bids and close projects. He landed several big contracts and sold a spec house he had been building which enabled him to pay off a large chunk of debt. Faithfully following the money management system, the weekly financial planning meeting included income planning for closing new projects out on bid, promoting for new projects, and allocation of funds to keep digging out of debt, keep current projects moving, and paying current operating expenses. Here is what the client had to say about the Money Management system:
Less than 3 months ago the likelihood of paying off a huge debt without borrowing money seemed impossible, much less figuring out how to continue running our business without any money, except what we were making week to week. Our stats [production statistics] were down, the quality of our work was poor, jobs were not profitable, acquiring new contracts was at a stand still and we were BLOCKED.
Using Cash Flow Mojo, with help from Sandra Simmons, we did our financial planning faithfully. It brought us understanding of what caused our financial difficulties in the first place, peace of mind through a very stressful period, and the ability to get through each week with a plan of action that allowed us to systematically work ourselves into a better condition in just a short three months. Now the contracts are flowing in, we have qualified personnel, great profitable work, haven’t had to borrow a penny to pay off debts and now have a very simple and workable technology to flourish and prosper, which we are.
Using the Cash Flow Mojo software in this construction company, the weekly allocation of income included percentages to pay for job costs, reduce debt, pay regular expenses on time, promote the company and even set-aside funds for a long-term retirement savings plan,” she says. “The increase in income from cost cutting measures, promotional activities and weekly income planning was immediate and profitability was on the rise.
The success of the plan was driven by owner’s decision to fully embrace the cash flow management software and keep the discipline in. Once that decision was made, the rest was easy. As part of the plan, statistical graphs are being charted weekly and the decrease in debt and increase in cash reserves are proof that the weekly planning continues to work. Keeping the action in to keep a tight control on job costs, raise income and pay off debt is handled in less than an hour each week using the money management software, and the company owner spends the rest of the week with his attention on writing bids and closing projects.
He isn’t worried about the money any more and he’s having fun doing what he loves to do, constructing new, beautiful buildings. He actually beat my 8 month estimate of how long it would take to turn the company around by a couple of months. That is a testament to the power of the Cash Flow Mojo software program when it is kept in and used as intended.
If you would like a consultation regarding your construction company or general contracting company, contact Sandra Simmons at 239-331-7055 or contact us by e-mail
Cash Flow Management: Construction Company Case Study