From the time this type of thinking starts to permeate the organization it is just a matter of time before there will be a cash flow crisis.
While it is true that construction is a relatively low margin business if the business is run well it does provide a great Return on Invested Capital (ROIC).
Part of being well-run is not putting more capital at risk in the business than it needs to run. We see similar sized and types of contractors run on very different levels of capital.
You don’t want to be under capitalized to the point where you are paying all bills late and not able to invest in the future.
You also don’t want to be so over capitalized that you are failing to get a good return or your discipline around cash flow management slips.
Excess capital should be set aside to fund smart growth, a succession plan, acquisitions, other investments outside the contracting business or for a rainy day.
Ask your CPA, banker, surety and if applicable your consultant how much capital your peers operate on. Set your target capital levels at the lower end of the bell curve and design your cash management systems to make that work.
We are revamping our publicly available cash flow workshop that includes 18 techniques that contractors can use to accelerate cash flow. Stay informed of updates on release.