Construction Companies have been through a lot in the last few years. Commercial construction has dropped off from its high in 2006 by almost 70% and residential construction went from an annualized rate of 1.8 million units to only 300,000 today. These drops in activity have left the wounded and dying construction companies on the field of battle wondering if it will ever get better.
Many companies that prospered in the boom years have learned the hard way during this recession that, “an abundance of cash flow covers a multitude of sins”©2011 TFC. This simply means that when there is plenty of profit to go around, inadequate internal controls and poor work processes can go undetected for years…until the cash dries up!
Vacillating over the question of whether the economy will get better is one of the worst ideas that a construction company owner could ponder. This question is of little use to the construction company owner, for the overall economy is not something that an owner can control. It would be a much better use of time and energy to exploit items that are controllable and are keys to immediate profitability such as:
1. Train ALL staff to Prospect…and Reward them for doing so. Sales and Cash Flow is the life blood of any company. Everyone wins when you have more business so encourage your staff to bring you leads. For example, on several occasions, our office and construction field employees brought us work by talking up the company to their friends and family members.
2. Train ALL staff that they are in Sales. You may think this is trivial, but not all employees understand this principle. I once had a construction manager tell a prospect that, “we don’t erect building shells, we only do complete design/build projects”. The prospect moved their business to a competitor and we missed $250,000 gross profit as a result of that slip of the tongue.
3. Train Sales Staff how to Prospect! In Business to Business sales the telephone is still your best friend. Yet, most sales people have a fear of the phone, a fear of rejection, a fear of those in authority, and no prospects. Teach Salespeople how to find prospects in their everyday activities and you’ll have more than enough prospects to turn into sales.
4. Train Sales Staff how to sell! Once I was on a sales call and the salesman made a great presentation, yet failed to ask open or closed questions in a systematic manner, answered a probing question that I directed to the prospect — instead of allowing the prospect to answer, and failed to ask for the sale. How often does your sales staff do similar non-productive things?
5. Teach Sales Staff that not all sales are good sales. Want more cash flow? Unprofitable jobs steal much needed cash and could be avoided if jobs were analyzed BEFORE they were taken on. Take the time to work through the estimate thoroughly and not just jump at the chance to have work. The time you take during the estimating stage will result in a gain or a loss of cash flow.
6. Guerrilla Marketing – Position your company as a winner in the market and achieve greater market share for little cost. Inexpensive is not impossible. Sponsor seminars, write articles, fix up your website, or find creative ways to reach your target market without spending a fortune.
7. Controlling Overhead – The keys to profitability are as simple (and hard) as realizing what can be reduced and what can be eliminated to improve cash flow. Do you really need an office in a city 60 miles from home? What about all those cell phones that you pay for month after month? Will the company suffer if the employees can’t call home at a moment’s notice? Scrutinize Gas Cards, Trucks, Travel Expenses, Office Trailers, and the alike to see where costs can be cut.
8. Improve Job Costing – For certain contracts – especially government contracts, cash flow can be accelerated by instituting more accurate and consistent job costing resulting in larger immediate billings. If overhead is a billable expense, it will quickly pay for someone to more accurately quantify and document the expenses that qualify as reimbursable according to the contract. By re-reading the contract and discovering that the client’s definition of overhead was much broader than our own we were able to greatly improve our profitability and our cash flow. By re-defining our overhead costs to match the clients’ contractual expectation we gained $100,000!
9. Worker Productivity – Morale is a lost science in America. True Story: A company told a department that compared to their peers in the industry they were all “over-paid”. When the meeting was over one employee was asked to “return” $0.12/hour that they had been “over-paid”. What do you think happened to department productivity?
What can you do to improve productivity and profitability? Studies show that you can increase your worker productivity by five percent or more. Did you know, depending upon the business, a five percent improvement on gross profit can result in one percent increase in net income.
In other words, if your gross margin is 20% and net income is 5%, a five percent improvement in gross margin would be 21% and net income would be 6%, an increase of 20%!
10. Contingency Based Profit Recovery – This is a real way to generate cash flow. So real, in fact, that one company pays for an extra office employee from the annual savings. Have you over-paid on Worker’s Compensation Insurance, FED-EX, UPS, or Phone bills? Having professional audits produced usually cost nothing and yet will return 50% of the savings…savings that create positive cash flow.
11. Pro-Active A/R Collections ©2011 TFC. Due to the recession, many construction companies’ receivables have fallen to greater than 100 days. This delay in collecting what is owed can cause companies to utilize their line of credit and having to pay for the privilege of doing so. Worse, instead of being able to bank the money and earn interest many companies are borrowing extravagant amounts of money just to stay afloat.
Yet, instead of taking the traditional passive collection route, smart companies are becoming much more proactive in their collections and are getting ahead of their competitors.
12. Change from Financial Accounting (that does little more than tell you how much tax to pay) to Managerial Accounting that will improve your projects’ profitability with rational decision making – instead shooting from the hip and hoping for the best. With this simple change, businesses can actually manage projects, reduce gross margin shrinkage, and greatly improve cash flow.