Growth is great, but growth without cash flow to support it can actually be a killing blow to your business. Sacrificing profitability for growth is like digging a grave and thinking you are building a castle. You’re not, and eventually you’re going to get buried.
You need a cash flow plan that covers your present needs and your growth goals.
Growth can be a killer
Uncontrolled growth is one of the top reasons contractor businesses fail. In the race to win more bids and execute on those contracts, well-intentioned business owners push their company over a cash flow cliff. Growth is critical to long-term success, but if you are bidding too low on projects just to win them and “grow,” you are doing more harm than help to your company.
Taking on projects in a new geographic region or that involve work your team is unfamiliar with is exciting. It is also a potential profitability nightmare. Without the cash to cover the costs of setting up your operation somewhere new (including potentially increased supplier costs and transportation or even lodging for labor), you could find yourself working at a loss.
Profitability and growth have to go hand-in-hand. That means building out cash flow plans for every project to ensure each job will eventually sustain itself and close out with a profit for you.
Why cash flow management is critical to growth
Cash flow is also in that list of construction contracting business killers. Cash flow in construction is complex—with high costs around new work, protracted payment schedules, and a constant cross-stream of money in and money out as pay apps are approved and vendors are paid. A lot of contractors compound the issue by running all of their cash through one checking account and not implementing a defined, 13-week cash budget. You have to know where your sources are coming from, and what expenses or uses of cash are expected each week. Otherwise, it is nearly impossible to know how much free cash flow (funds not earmarked for another expense) you have on hand at any one time. And if you don’t know how much you have, it is even harder to know how much you will need in the future.
If you don’t already have an accountant, hire a CPA before you launch a growth phase.
You need a cash flow plan for your business’ regular operations, for every project, and as part of your growth strategy. It’s the only way you will be able to see where you are now, where you want to go, and how to get there.
Building a financial plan for growth
Uncontrolled growth and poor cash flow are a result of inadequate planning. To achieve the growth goals you set out, you need a strategy that includes a financial plan that covers the cost of the growth.
Leverage all of your options when building your financial plan for growth. Is there overhead that can be reduced? Can you negotiate better terms with suppliers? Every dollar you can save is a dollar you don’t have to cover in your growth plan, making it that much easier to reach your goal.
One key mistake many contractors make is the desire to self-fund their growth. This is an important lesson successful business owners learn early — funding your growth by borrowing capital isn’t “bad debt,” it’s a smart investment.
Finally, analyze which types of jobs are best for your profitability. Target the GCs who offer those types of projects. Find your sweet spot and dig at it until you strike gold.
Growth can’t be avoided—in business you are either growing or dying. Grow with a cash flow plan that supports you, your team, and your clients, and you can grow with confidence. You can also live with a lot less stress too – growing your business does not have to be so stressful you can’t sleep or hurts you mentally.
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