Issue 5 of 9: Cash Generation

Construction Ownership Transition Issue 5 of 9: Does the Business Generate Enough Free Cash Flow to Make the Transition Equitable for All Parties?

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Succession: Ownership Transition Issues - Number 5 Cash Generation.
  • Building construction projects -- just by themselves -- is very cash intensive
  • For that reason, a contractor must have enough working capital along with financing provided by their operating Line-of-Credit (LOC). Depending on the type of contracting business (GC, Specialty, Civil) and work types, this might range between 5-15% of the revenue.  
  • Growth requires building additional working capital to run the business safely. Your financial partners will ensure that you work within those constraints.
  • Working capital is only built through earning profits and retaining them after taxes are paid.  

For a simple example: If a contractor requires 10% of their revenue in working capital and is projecting $50M in revenue the following year, they will will need $5M in working capital. 

If they earn a 5% pre-tax net profit and pay 40% in taxes, they will retain $1.5M in earnings.  

If they plan to grow by 15% the following year to $57M, they will need another $700K (10%) in working capital.  

That means they will have $800K in free cash flow to pay for the business or provide a return on capital invested by the new ownership group.


Succession
Continue building value in your business, yourself and your key team members with a good succession strategy....

Succession
Continue building value in your business, yourself and your key team members with a good succession strategy....

Production Tracking - Changing the Language
Your productivity will start to really improve as it becomes a culture and not just a tracking system. You will first notice this as a change in language in the field and across the whole project team.
Cash Flow Tip 7 - Schedule-of-Values
Having a good SOV and billing format will set you up for cash flow success throughout the project.
Problem-Resolution Cost Pyramid - Earlier is Always Better
An easy way to visualize the cost of problem resolution at different stages of construction is with this pyramid. The cost of the problem is the cost of the problem (1X). Finding it ahead of time minimizes the costs and maximizes customer satisfaction.