How to Maximize Profit and Cash Flow in the Growth Stage
Struggling with cash flow as your construction business grows? Learn essential strategies to maximize profit and maintain cash flow during critical growth stages. Wade Carpenter and Stephen Brown share expert insights on navigating financial challenges.
Watch now for practical tips on pricing, billing, and cash management. Don’t let growth sink your ship!
Topics we cover on this episode include:
- 00:16 – Cash Flow Challenges
- 00:44 – Growth Phases
- 02:12 – Overhead and Profit
- 03:29 – Pricing and Markup
- 04:40 – Cash Flow Forecasting
- 06:31 – Accurate Financials
- 08:14 – Startup Phase Mistakes
- 10:30 – Cash Flow Control
- 12:41 – Growth Phase Risks
- 14:40 – Maximizing Profit
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com
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TRANSCRIPT
[00:00:00] Wade Carpenter: Are you finding it challenging to keep up with cash flow as your business grows? Have you ever wondered how to ensure that your profits don’t slip away during expansion? Today, we’re tackling the essential strategies to help you maximize profit and maintain cash flow during these critical growth stages.
This is the Contractor Success Forum. I’m Wade Carpenter with Carpenter Company CPAs. With me, my co host, Stephen Brown with McDaniel Whitley Bonding and Insurance. Stephen, as contractors scale their businesses, are you seeing them struggle with cash flow and profitability?
[00:00:28] Stephen Brown: Yeah, Wade. We just did a podcast on the five stages of a construction company. And as you go through each phase, there are certain things that affect your cash flow, which in return affect your profitability that you need to be aware of. Is that kind of where you’re headed with this topic?
[00:00:44] Wade Carpenter: Yeah, when you brought that up, that actually spurred me thinking about several of the conversations I’ve had with contractors lately. They have been running out of cash right now. And in a lot of cases they’ve been experiencing the growth and the effects of that. And, there’s a lot of reasons for that.
But, if your revenue doubles, and people are taking 30 or 60 days to pay you you got X amount in receivables, receivables are going to double. You may eventually have that cash, hopefully it’s still profitable, but it’s not in your hand. So in the meantime, you got more capital outlay to make sure that you’re covering your labor and materials and your equipment subs and all that.
So there’s a lot of reasons for that, but I’ve had several conversations, and when you brought up that growth phase episode a few weeks ago, that sort of kicked this one off for me.
[00:01:31] Stephen Brown: Sure. As each growth phase evolves, needs based on where you are affect your cashflow and your overhead. And sometimes when you go from one stage to another, it affects it so drastically that it kicks you into another stage.
When we talked about the stages were not good or bad. They were just a stage. Some contractors can stay at a certain stage forever and be perfectly happy. But the natural evolution of the construction firms go through these five phases. And if you don’t know what’s gonna creep up behind you and destroy your profit in each stage, it could sink your ship.
[00:02:11] Wade Carpenter: Absolutely. And again, there are several common challenges that we face during growth. It’s very common to think that if I just get to this next level, everything is going to be fine. And maybe you’re way in debt right now and you just, okay, so I’m a half million, let me get to a million. Once you get to a million, let’s get to two million or five million.
And what people end up finding out is that they get deeper in debt. They still have no cash and sometimes they have even less cash to take home. And there’s a lot of reasons for that. We’ve talked about, as the top line revenue grows, it’s very common for your overhead to grow at a faster rate than the top line revenue.
And so that’s putting a bigger squeeze. You’ve got more revenue to cover, so you need more infrastructure. You may need some more equipment. You may need another administrative person or another project manager or whatever, but all that overhead challenges all this growth.
And, as soon as you hire that next person, and you didn’t plan for it, that can rob that overhead factor of, what you had already planned. And maybe you were basing your bids on an overhead factor from last year, but now you got two or three more people here you got to cover.
You got an office you got to cover.
[00:03:19] Stephen Brown: And that, and those changes are financed b y the money that you have in your company, or from future profits on these particular large jobs. It’s scary.
[00:03:29] Wade Carpenter: Some of the other things that I see is, again, people think , I just got to get to this next level. And it’s okay I can bid something lower as long as I’m going to make it up on the volume. And just doing it for cashflow. But a lot of times these contractors were bootstrapped to begin with.
They started on a shoestring budget and they’ve been running like crazy. All they’ve done is built more work, and they’re going to be chasing the cashflow even harder.
So in the times of growth, one point I wanted to make here is making sure that you are reviewing your pricing. And that you are covering your markup and your overhead.
You know, some topics we talked about. And don’t cut it just because you’re going to get a higher margin. Just because you think it’s going to get you to that next level. You got to remember, that next level is probably going to cost you more overhead. So don’t cut your pricing just because you think it’s going to get you net more cashflow.
[00:04:23] Stephen Brown: Yeah, Wade it’s all the time contractors say, if I double my income, I’m going to double my profit. And that will take care of my debt. It’s the answer to all my problems.
[00:04:33] Wade Carpenter: And it never seems to happen, does it?
[00:04:35] Stephen Brown: No, it doesn’t. And one thing that I like is we did a podcast on calculating profit margins correctly. We’ve had numerous podcasts on increasing your cash flow, so you don’t have to borrow cash, so you don’t have to finance projects.
The money that you keep in your company should be there to help your company grow, accomplish what you want. That’s why you keep money in your company, to get to the next growth stage.
I’m thinking right now that all the surety companies are talking about, How many more contractors they’re seeing, maybe it’s because of us getting close to inflationary area, having to spend more money to get supplies and materials on time, and also the overall cost of everything. That they’re into their bank lines more than ever before.
And interest rates are high. They were talking about a huge new low on the mortgage rates this morning of six and a half percent. So–
[00:05:27] Wade Carpenter: Mortgage rates are not a lot of credit rates either.
[00:05:29] Stephen Brown: Not exciting news, is it? Yeah. It’s prime plus 2%, right? Or 1 percent if you’re lucky.
[00:05:36] Wade Carpenter: Again the idea is, as a business scales up, you’ve got to control your pricing and, making sure that you’re realizing that you are going to have, need more money for that. If your receivables are 100, 000 and they go to 200, 000, that’s another 100, 000 of cash you don’t have in your pocket.
It’s either got to come from a line of credit or from profit. I always go back to some of the Profit First principles, but, part of Profit First says we’re going to have some profit left over, but maybe half of that is going to be retained in your business to allow for future growth. And I think that’s brilliant because people don’t think about that.
They basically bought a job and they’re trying to milk it for all they can, but sometimes they’ve been in such a cycle of chasing cash for so long, they take it as soon as they can get it, right?
[00:06:22] Stephen Brown: Right.
[00:06:22] Wade Carpenter: Part of the things that I wanted to maybe talk about today was a little bit about maintaining those profit margins, but, maintaining the cash flow.
I was talking to somebody about this recently as well. The timely and accurate billing, making sure that your bills go out on time is half the battle.
And, some of the, if you’re a subcontractor, a lot of these general contractors, rightly they want their paperwork right. And if you don’t get it right this particular month, you’ve got to wait another 30 days to get that in and get paid.
So this is the time, especially if you’re on a growth phase, you need to focus on some of these fundamentals. The fundamentals like, knowing, first of all, if you’re working with a general contractor you never worked with before, know what their billing practices are. Know how to, if they’re requiring an AIA type billing pay app, then know how to do it or get somebody that does know how to do it.
And, I’ve seen several of those get kicked back because they’re calculation errors or they’ll go to an architect and they, you know, some little small math error, they just throw the whole thing out. But this is the time that you need that cash flow and you don’t need any of these hiccups.
[00:07:24] Stephen Brown: That’s a great point, Wade. Really, honestly, we’ve had other podcasts where you have stressed Profit First, of course, but also maximizing your cash flow.
I thought maybe there was another different word to explain it, but that is exactly what you’re wanting our listeners to accomplish. When you’re maximizing cash flow, you’re doing everything you can to make sure that it’s coming in right on time or ahead of time.
Anything you can do to control that and to monitor it, and to make sure that it’s happening. We’ve talked about that.
[00:07:59] Wade Carpenter: It’s maximizing cash flow, but it’s also maximizing that profitability too. I see it all the time with we want to get in good with this general contractor. So we say okay, I’m going to bid a little lower this time. So we can just get to that next level.
They drop some of the margin and it becomes basically a cycle that they fall into. And you know that on top of this overhead impact, and again I’m going all over in the strategy with this, but again if you put Profit First in place, if nothing else and you’re maintaining that percentage your operating expenses are going to get a little tighter, and if your overhead percent is 20 percent or whatever your number is, and all of a sudden it jumps up to 25%. You’re going to start running out of cash.
You’re going to start feeling that faster. So in a way, Profit First limits your upward growth of this overhead because you are going to be feeling it. And probably a lot faster than, sometimes you can have a big retainage check come in or something like that.
And you’ve got a windfall of money, but next thing you know, you spent all of it and you realize, hey, I couldn’t really afford to go hire that extra guy.
The other part that I wanted to talk about was not just billing, but if something is past, you know, it’s 30 days and they’re supposed to pay in 30 days, a lot of people just let it slide and they don’t want to pick up the phone. They don’t want to, but in the growth phase, you really need to be very diligent about collecting money and following up on overdue payments.
Making sure that you’re promptly going after that kind of stuff to help ensure the cash flow remains positive. Because again, this is the time it’s going to be squeezed when we’re in growth phase. As we said, it’s very common, whether you’ve got Profit First in place or not, your overhead factor has got to grow.
Making sure not only you’re managing your overhead, but you’re also, if it’s changing, then we need to change that factor that we put in our bidding.
[00:09:49] Stephen Brown: I get that. And what you were saying really makes a lot of sense, Wade. Profit First solves a lot of problems. It forces you to deal with what you have to deal with, no matter what your sales are. It takes the emotion out of it. If you’re heavily in debt, it teaches you how to bid things properly, how to manage your cashflow.
And, the whole premise of it, I think it’s wonderful, Wade. And you were telling me a little bit about a book that you’ve written.
[00:10:18] Wade Carpenter: Yeah, we finished the first draft of it, and actually I got the first draft of the book cover from Mike Michalowicz with Profit First for Construction. That’ll be coming out in a few months, I hope. But a lot of these are fresh on my mind, but you went back to like accurate cashflow forecasting, having accurate financials to look at and seeing where you’re at.
I had one last year that became a client and they had grown to 5 million and they had never gotten their books straight. And they’ve been running about 12 years and they finally got to a point where they said I can’t continue to run this way.
And they are actually probably the exception because at some point when you get, above say, million dollars or, even above 500, 000, it gets harder and harder if you don’t have control over this.
But it’s very common in the startup phase, where you don’t have good books, and you say I can just do this myself. I can get Quick Books and it’s supposed to do all this for me.
That’s where I know I feel like I’m preaching and that’s what I do as far as accounting. But it is very true that a lot of people get to this growth phase and they really don’t have books and records and they finally wake up one day and say, I got to do something a little different.
Otherwise, I’m gonna run out of money and I won’t see it coming.
[00:11:31] Stephen Brown: You’re right. And whatever stage you find yourself in, you can get some advice and you can work out of it, can’t you, Wade?
[00:11:38] Wade Carpenter: Yeah don’t get me wrong, because construction is one of the toughest industries for cash flow, and Profit First is not the end all be all, if you don’t treat it right. But if you’re not properly, if you don’t know the margins that you’re supposed to be getting, you’ve got to get a lot of these fundamentals down.
And, typically a lot of people, I see it all the time that they get in this startup phase. They don’t think they have any money to go see a CPA or get advice on their structure and their taxes. And they start getting into this growth phase, oh crap, I’m paying more taxes, and I don’t understand why.
And it’s not all about that, but, it’s, did we just start up as a sole proprietorship, and did we just do an LLC, and we really have no liability protection because our friend just told us to do an LLC, and it was easy to just go online, set it up ourself. But we got no advice about how to structure that.
[00:12:30] Stephen Brown: Sure.
[00:12:31] Wade Carpenter: Again, as you grow and your company grows, hopefully you’re building some assets that you want to protect. And we got a great person that can give you some good insurance to protect some of those assets. But, things happen and people get sued in construction sometimes. That’s another thing that we should probably be talking about is the growth phases, you’ve got more to protect and you probably need to be looking at the overall risks that you’re taking, and that’s probably something that you can talk about better than I can.
[00:12:54] Stephen Brown: Oh, sure. Back about all the podcasts we’ve done, Wade, and how some of them are so right on the money on the right topic, because we’re excited. They fall into what we were trained to do. You were trained to help contractors with their accounting. And I was trained to make sure their assets were protected and to provide them surety bonding.
And there’s to me that, like you just said, the most interesting thing about the construction industry is the risk involved. Everything’s different. Things happen. Things happen all the time, and all you can do is learn from others so you can control that risk, but it’s so rewarding. What an industry that it could be so rewarding, that can be lucrative, that can accomplish things when you accomplish something that you never did before.
I guess my pep talk about this cash flow is always wherever you are, you can get out of it and you can move in the right direction. Maximizing cash flow is key in these different stages of growth, working your way out of debt, working smarter, not harder, and concentrating on your profit.
And then managing everything backwards from there, are the fundamentals of what we seem to talk about all the time.
[00:14:05] Wade Carpenter: I was talking to a contractor recently and, he was talking about the fact that, he just loved, when he got into construction, it’s you start a project and it’s a mound of dirt, and then, a month or two later, you got something that you built and you’re proud of.
And a lot of times people translate that as I’m going to be an owner of a construction company. And then, they still may be really good at building that building, or doing what they do, but they never really have gotten on top of things. And in this growth phase, this is the time you really need to do it. If you’ve already come through that startup phase, and you’re in that, I think the second phase of, they called it the survival stage, didn’t they, Stephen?
[00:14:47] Stephen Brown: Startup, survival, success, growth, and maturity.
[00:14:50] Wade Carpenter: Yeah, that survival stage, that’s where this cycle of cash flow can just weigh you down, and then as you get into these growth phases, this is where it’s sad, but people have, I’ve seen many times people will grow it, and grow themselves right out of business, I’ve said it many times, and I’ve seen it many times.
They don’t realize what their overhead structure is, and then they either go back to getting really small, or do they have to bankrupt the company or something like that and start over.
[00:15:16] Stephen Brown: Okay. That’s a, these are great points, Wade. Thank you.
[00:15:19] Wade Carpenter: Okay. I think I just ended that on a really poor note.
[00:15:22] Stephen Brown: No, you didn’t. We want to be upbeat in everything that we podcast, of course. We want to talk about everything that’s upbeat and this is an exciting business to be in. And I think you’ve communicated that perfectly, Wade.
[00:15:35] Wade Carpenter: If any of our listeners have any thoughts or feedback on today’s discussion, we’d always love to hear from you. Happy to answer any questions or thoughts on other topics you’d like us to cover. Drop ’em in the comments.
Thanks for listening to the Contractor Success Forum. For more information, visit contractorsuccessforum.com, the Carpenter CPA’s YouTube channel or ProfitFirstConstruction.com. And if you enjoyed this episode, please subscribe, and share and follow us every week and we will see you on the next show.