We’ve created a lot of resources about the importance of cash flow management for your business. Let’s take a step backward and start at the beginning. What IS cash flow and why is it so important to understand your company’s cash flow?
What is Cash Flow?
Cash flow is the net amount of cash (and other cash-equivalent assets) that move in and out of your business. They flow in when cash is received — which is called inflows — and they flow out when money is spent (outflows).
Cash flow is often referred to as “the lifeblood of your business,” but another analogy is that cash flow is your company’s oxygen. Cash must flow in, and cash must flow out. This flow of cash in and out of your company is needed to keep it breathing — to pay your team and your vendors, to invest in growth and to heal from unexpected challenges or adversity.
There are several types of cash flow business owners should know, understand, and track. Let’s quickly define these, along with a few other terms you should understand in order to manage the finances of your business.
Operating cash flow is all cash generated by the purchase of your company’s main service or product.
Investing cash flow includes cash generated by investments in capital assets or other ventures.
Financing cash flow is the money you take in from debt or equity, less the payments you make on that debt or equity.
Positive cash flow shows that your cash flow is increasing — more money is coming in than out.
Negative cash flow, conversely, shows that your company has more outgoing money than incoming.
IMPORTANT NOTE: Cash flow can shift from positive to negative or vice versa from week to week or month to month. This is why proper cash flow management is so important.
Free cash flow is the money leftover after all expenses are paid. Free cash is one of the most important aspects of cash flow management, as it determines your ability to grow, to recover from a bad project or a bad season. Free cash flow can also impact your team’s performance.
Operating account is the general bank account used to process most of a company’s expenses. Many businesses run everything through an operational account, however, we recommend setting up at least one separate account.
Payroll account is a bank account reserved for payroll activity. Separating this from operations ensures you always have enough money for payroll, and that you can easily track payroll separate from other expenses, ensure the payroll taxes are paid, and any other employee related compensation associated to the business.
How cash flow relates to profit
Obviously not all of the money generated by your company’s activities is profit, but it is all part of your cash flow. Knowing how much of the revenue generated is profit, or free cash, and how much must be reserved for expenses, is critical to cash flow management and the vitality of your business.
It is entirely possible to be profitable and have a negative cash flow. This is especially common if there is a long delay in payment and whether or not you are running using Accrual or Cash based accounting. It is also possible to have a positive cash flow and not be profitable. For example, if a construction contractor company is taking on some additional debt or factoring their receivables they could likely create positive cash flow for a certain period of time. However, if the company’s bids are too low to accommodate overhead and project expenses, or the company’s debt payments or overall expenses are too high, the company will not be profitable despite the additional cash created by the loan or factoring.
Managing your company’s cash flow
The first piece of advice we give clients struggling with cash flow management is, Hire an accountant. Preferably a CPA. This first step is a huge differentiator. The accountant will create a structure to manage your books and your business
A lot of business owners start out managing their own books, only to discover too late that business financial management is far more complex than balancing your household checkbook. Hiring an experienced accountant or CPA pays for itself when you consider:
- the time you’ll save NOT keeping accounts in order, cutting checks, and worrying about the business bank account
- the late fees and overdraft fees you WON’T incur when someone is properly managing company finances
- the potential revenue-generation strategies your accountant will uncover by analyzing your company financials
- the stress relief AND potential savings when taxes are in order and returns filed properly
- the growth you’ll experience when you have a financial game plan that supports your goals
PRO TIP: We see companies that hire and work with an accountant all year save thousands of dollars — more than what the accountants fees are — just in tax savings alone. Many business owners think accountants are too expensive and hire them at the end of the year just to do the taxes. At that point they are very likely not getting any real value, compared to if that accountant was in place all year long and set up the financial system from the beginning.
Whether you hire a professional to manage your accounting or continue to manage it yourself, you need to educate yourself on your company’s financials. What is your monthly overhead? What terms do you have with suppliers? What profit margin are you currently averaging on new work? Even if a CPA is pulling these numbers for you, it is important for you to understand them in order to know what actions you need to take in order to keep your business profitable and growing. This is also the real hidden value in having a CPA / Accountant on your team.
The last tip is to track your cash flow. Expenses can shift and new work or growth can mean new costs as well as new revenue. Tracking cash on a regular basis (weekly, monthly, quarterly, depending on your business’s needs) and estimating the expected flow on projects lets you see problems in advance and solve for them.
Want more cash flow tips? Read this blog next:
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Purpose-driven goals shifts a company’s objectives away from performance and financial targets and toward larger goals that help fulfill your company’s purpose. Don’t worry — we’re not saying you shouldn’t pay attention to sales, revenue, or new client acquisition. You absolutely should, we do too! But one way to ensure you reach those goals is to align them to your purpose.
Give your financials goals a purpose-driven WHY.
Why More Money isn’t the Goal
Raise your hand if your company’s biggest or only goal is tied to a revenue number.
Wrong idea. Put your hands down.
Why isn’t more money the primary goal? Because unless it is tied to something purposeful, more revenue doesn’t mean you will have more money or have power to improve your life, the lives of your team, or your larger community. For example, we talk to lots of business owners who have grown their company from $1 million in revenue to $5 million. They thought more money would lead to less stress and bigger paychecks but found that the opposite was true. They were working more and taking home the same paycheck with way more stress!
WHY was the money necessary? What was it supposed to do and HOW was it supposed to do it? A purpose-driven goal aligned to a top-line revenue goal would have helped solve that.
Growing your top line revenue from $1 million to $5 million will probably change your business, but it might not necessarily change your life or the lives of your team members unless it is profitable, sustainable, and rewarding. Rewarding is defined as tied to a specific purpose that you and your team are aligned to.
In fact, if your team is already feeling overworked and unfulfilled, more revenue only means more work to do and an even greater lack of fulfillment.
Why Purpose-Driven Goals are Good for Your Team
Purpose-driven goals are shown to inspire teams and improve performance. Money without purpose can drive short-term performance, but it can’t stop things like burnout and employee unhappiness. In fact, Harvard Business Review says that when money is the goal, burnout is more likely. The research was related to entrepreneurs, but we can all relate to feeling drained by work rather than energized by it.
You want to see your team jump up and hustle? Give them a goal they can care about. It might be directly related to your company — like building an outdoor lunch area or a company retreat — or it might be something external, like supporting a charity or organization in your community. Whatever it is, make THAT the goal, and draw a line directly from it to the team’s increased efforts. They’ll stay motivated and more revenue will naturally come from their inspired performance.
Making money is the thing that facilitates the goal. It’s the fuel in the car that is getting you to your destination. It’s NOT the destination.
Our CEO Scott Peper shared an example of purpose-driven goal setting at the Tampa Build Expo, in his class Building a Business with Purpose. He said:
We have a culture initiative at MF called “The One More email.” It is from a line in our core value LEADERSHIP THROUGH ACTION. It says, “Do one extra thing for each person you come in contact with each day.”
To encourage this core value and celebrate each other’s hard work, every MF employee sends out an email on Friday with one example of a “One More” that they did for someone else.
They also get to nominate each other for something extra. The winner each week wins a prize like a gas card, Starbucks card, or even an extra PTO Day.
I expect 100% participation. Here’s the interesting part: The prizes are not enough of an incentive. My expectation that they all contribute isn’t enough of an incentive.
So, I set a goal. The goal is not “100% participation.” The goal is “up to $600 for a charity you care about.”
See, leadership puts money toward the donation every week that we have 100% participation. The team selects the charity every quarter. It is always something they care about passionately. We have donated to K9s for Warriors, the Construction Industry Alliance for Suicide Prevention, and a charity called A Kid’s Place, which works to keep siblings in the foster system together.
The team absolutely crushes it. Why? Because they rally around the CAUSE they are supporting.
Find something your team can believe in, something that will improve their work, their lives, or their community. Make THAT the goal. Then show them how increased revenue will help them achieve it.
Tips for Purpose-Driven Goal Setting
Set individual KPIs. Once you have a goal tied to a performance or revenue objective, you have to make sure that each team member understands the key metrics in their specific role that will contribute to the overall company goal. Work with them to set Key Performance Indicators (KPIs) around their own work that show progress toward the goal.
Goals should be ambitious. They should motivate your team to work harder and collaboratively. But, setting goals too high can have the opposite effect; unattainable goals set by management can feel like a setup for failure. Make sure your goal stretches your team but doesn’t break it.
Milestones should be achievable. If goals are ambitious and lofty, the milestones you set to show progress should be achievable. Think of it like this — if you have a goal to run a marathon, your indicator would be “miles run daily” and your big milestones might be one mile, 5k, 10k, half-marathon, and full marathon.
Set a goal that is bigger than your business, defined by your Purpose Statement, and easily measured by a relevant indicator. Communicate the goal with your team, why it matters and how you will track progress toward the eventual finish line.
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Cash flow management is essential to a construction contractor business. Every business shares a common need: Cash. It pays the bills, it keeps the lights on, it puts food on the table. Cash isn’t just king — it’s LIFE. Yet for many contractors, this critical aspect of their business is managed ineffectively or not at all.
We invited Suzanne Cox, CPA, CIT and shareholder at Saltmarsh, Cleaveland & Gund, to share some of the cash flow management strategies she recommends to her clients. Step one, she says, is to understand where your cash comes from, and where it goes. “If you haven’t done a formal cash flow for your business previously,” says Cox, “it’s a great exercise to walk through.”
Catch the entire conversation with Suzanne here:
Creating an Organizational Cash Flow
While we recommend working with an accountant, preferably a CPA, your first business cash flow doesn’t have to be a complex document filled with formulas you don’t understand. Start simple: What are your sources of cash?
There are three major sources of cash—operations (company revenue), investments, and finance (loans, lines of credit, equity raise). Most of a typical contractor’s cash flow will come from operations, from the work you perform. When you bill your customers or submit a pay app and then get paid, that’s a primary source of cash. Consider if you have other sources as you prepare your cash flow statement.
Now that you have your sources of cash, list out all the uses of cash in your company. Payroll, materials, insurance, fuel, all count as uses of cash. Don’t forget the overhead expenses it takes to run your business—rent or mortgage, vehicle payments, utilities, supplies, marketing or advertising, etc.
Bonus: Knowing your true overhead is critical to smarter bids that secure a good profit margin on every job. Learn why in our article Margin vs Markup.
Cox says that cash flow statements aren’t just for your organization; you should complete one for each new project as well. She says, “It’s very important to not only project your sources and uses on a company wide basis, but also on a project wide basis.”
Cash Flow Tracking
We created our Project Cash Flow Tracker (get yours on our Resources page) because we knew it was important for contractors to see how project expenses marry up to the job schedule and exactly how much cash is needed each week. The same is true for your organization. The cash you have in your bank account isn’t necessarily the cash you have free to spend. You need to know when cash is needed, what it is needed for, how much is needed, and where it is going to come from.
Tracking cash flow across your entire organization can also help you break the habit of borrowing from one project’s cash flow to start a new one. Instead, you can estimate costs for a new project, analyze your current cash flow statement, and make an informed decision about how you’ll fund that next big job.
Creating a cash flow statement and tracking cash flow across projects and throughout the organization can be a real eye-opener, says Cox. It can reveal cash flow gaps in advance, as well as highlight some areas where you could conserve cash. “In construction, contractor owners are very focused on the work, they’re focused on getting the job done, they’re focused on doing a good job, they’re focused on not getting sued. There are all these priority items in your business that take precedent. Making sure you meet deadlines, and you don’t have liquidated damage charges, things like that. And so sometimes the operation of the business takes a backseat. Just the exercise of walking through a cash flow is beneficial. What do I need to make my business run? Where may I be overspending? You’re looking for things you don’t need to spend money on that maybe you are spending money on.”
Whether its rethinking terms with customers or suppliers or reducing overhead, you can’t improve your cash flow until you are keeping track of it.
Cash Flow Tips
How you manage your company’s cash flow can mitigate problems or compound them. Treat your company like a project, with a fixed budget and an approved list and schedule of expenses. (Actually, some of you may want to treat it better than a project budget.)
A good understanding of your company’s cash flow can reveal gaps in cash flow and help you spot solutions. Can you decrease your payment wait time? Should your next contract be negotiated as paid within a certain time, or based on milestones. Those kinds of decisions impact the project and your organizational cash flow.
Don’t be afraid to be honest with your general contractor, says Cox. “A lot of subcontractors feel like their hands are tied, and that they’re going to have to do whatever the GC wants. But if you explain to the GC, ‘I’ve got this situation, I need to get paid at these times’ and collaborate and come up with a mutual agreement that they want to use, they’re going to try to come up with a mutually convenient situation.”
Decreasing payment time can also be an incentive. Offer to pay suppliers upfront in exchange for a percentage discount. Similarly, see if your GC offers a discount to speed up your payment time. To make this strategy work, you need to already know what cash sources you have, what uses you expect, what you need, and what you can offer.
Cash Flow Management for Contractors
So, who does all this cash flow management? We recommend working with a CPA, but it is also important, depending on the size of your business, to have a good accounting team or person. Communication is key for cash flow management to work. If you are not getting the reports you need, work with your team member or CPA to get them.
Your accounting team and your project teams need to start talking, too. Weekly team meetings is probably one of the most important things that you can do, says Cox. “Include your project management team with your accounting team. Some of you might be thinking, Oh, my god there’s no way that’s happening. My accountants cannot be in this meeting with my project team.” A transparent and clear line of communication between accounting and project management is key for both parties to see how their decisions impact each other. “Whatever you need to do to make it work, make it work.” If an initial estimate had 100 square feet of tile, and now you need 400 square feet of that tile, your accounting team needs to know if the project manager is getting a change order for the extra 300, or if the company is eating that cost. Because if it was an estimate problem or your company is absorbing the cost for some reason, your cash flow just went down by 300 square feet of tile, and it is your accounting team’s job to budget for that.
“That’s my top tip,” says Cox, “go back and talk to your people and try to get them to talk to each other.”
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A construction contractor’s Schedule of Values is just as important to the project’s success as the bid. It also can help you get paid faster, retain more margin, improve your cash flow, and even improve your team’s performance.
That’s a lot VALUE hidden in your Construction Schedule of Values. To cash in on all of that power, you need to build your Schedule of Values with the same strategic consideration that you apply to your initial bid.
Building a Valuable Schedule of Values
Get granular. If you are installing the windows in a five-story apartment building, think about the time it takes to haul windows up to the second, third, fourth, and fifth floor. How many times does a crew member have to come back down? If you have the same labor rate and time for each floor then you are going to lose money on one or more of those floors. After all, it takes more time for your team to get up and down, wait on the elevator, deliver material, or even just run back to the truck from the higher floors.
Get specific. Make sure your ability to invoice isn’t contingent on another contractor’s performance. If your plumbing company is laying underground or foundational piping and the original Schedule of Values defines “complete” as “Capped & Sealed,” your invoice might very well be reliant on the concrete pour schedule. Align your Schedule of Values as close to your job schedule as possible, so you get paid for the actual work you did during that application period (i.e. month).
Get confident. Just like your bid, you need to be able to show your work when you submit a Schedule of Values and it needs to be easily verified as complete so you can get PAID. Leave as little room for subjective interpretation on the line items as possible. Be thinking, “To do a great job I need my money to be paid to me in order to maintain the quality work you expect of my company.”
Be Careful Where You Put Your Margin
Are you putting most of your project’s margin in material line items? It seems like an easy win, especially if you can negotiate good supplier terms.
Unless something goes wrong, like the cost of material goes up, or materials get cut from the job, or the General Contractor decides to buy the materials themselves.
Don’t leave your profit margin up to chance! If you put your profit margin in certain line items and remove it from others, then you need to make SURE the overall margin you intend to make is still there when you invoice.
It’s construction; a lot can go wrong, and at least one thing definitely will. You need to make sure that you are able to get some profit billed into every invoice it’s the life blood of your business.
Also, if you are putting your margin in certain line items, you better let your Project Manager know. They need to be aware of how that next materials order, or any Change Orders they receive, will affect the margin on the job.
How else do you spread your margin? You could add a percentage to every line item, or you could boldly list it in your bid. This is a power move. It says to the GC, “I know what my company is worth and what it takes to do the work we do.”
If that route feels a little too bold, take a look at your project’s Cash Flow Projection (you have one, right?) and spread your margin across line items so that your project cash flows itself faster and stays profitable throughout.
Download our Project Cash Flow Tracker Tool
Don’t forget the instructions!
Complete Your Schedule of Values with Cash in Mind
How would you do the job if money were no object? It’s not just a daydream; it’s the first question you should ask when creating your bid and your Construction Schedule of Values. If money was no issue would you run the schedule of the job differently and would it allow you to make more money by saving time and being more efficient?
It’s not just a matter of WHAT your profit margin is but WHEN you make it. If your margin is too thin or locked up in retainage, you’re impairing your team’s ability to perform at their peak and limiting your company’s ability to grow, or worse you may even be putting your company in jeopardy by limiting the free cash flow to the overall business needs.
What would the project’s cash flow need to look like to increase efficiency in the project? What would it take for you to start the job with materials on hand and a full-size crew? What would two weeks of saved labor costs do to your bottom dollar?
It can make a REAL difference. Take the 5 minutes and watch this video to see what we mean.
You can do this, too. All it takes is asking the right questions.
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A smart construction bidding process can not only help you win more jobs, it can help you fund your company’s growth and success. That may seem simple — bid more, win more, make more, right? — but the relationship between bidding and growth is more complex and filled with more potential.
If you are planning substantial growth for your construction company, optimizing your bid strategy should be part of your bidding strategy. Here are five tips for construction bidding that maximizes growth.
Be Early to Bid.
The first tip is to simply get a head-start on your competition. Keep an eye on bid platforms like BidClerk and ConstructConnect.
Rushing to throw together a bid just to be FIRST is a good idea poorly executed. Before you start watching bid platforms, optimize your bid strategy and polish your bid template so when opportunity strikes you are ready to grab it. A good bid template should include categories for all things that matter on a specific job and include the correct way to allocate overhead and profit. It should follow a specific and repeatable process to produce an outcome you can rely on.
Bidding first doesn’t mean you bid on everything. We’ll talk more about that in a moment.
Do the Homework.
First, the legwork. The more information you have before submit your bid, the smarter your bid will be. Study those drawings, specs, and plans. Make sure you see any potential problem areas and account for them in your bid. If something is designed in a way it can’t be built or will be very problematic make sure you make note of it in your bid. As part of your construction bidding process, make time to identify the decision-makers. If you are new to the GC, introduce yourself and your company. People want to do business with people they know and trust; building a relationship with the GC will help your company’s growth whether you win this particular bid or not. Include for the GC a list of references, jobs completed, and pictures of what you have done. This goes a long way and the attention to detail you show in your bid will be a great indicator of what they can expect from you if awarded the job.
Show Your Value in Your Bid.
If we only gave one construction bidding tip it would be this: BE CONFIDENT!
Confidence means highlighting your company’s expertise. You want to prove to the general contractor that your team, under your leadership, is by far the best answer to their need. Showcase your history and reputation too, and any special differentiators that a GC will care about. For example, REAL MF’er and Alphapex owner Charles Covey is proud that the Texas-based waterproofing company was the first large subcontractor in the United States to train 100% of its field staff with OSHA 30 certification. That’s a huge differentiator for general contractors and he definitely highlights that on his bid.
Showing your value also means showing WHY your bid numbers are what they are. Don’t be afraid to list out in a letter or even just simple bullet points what that GC / Project Mgr. can expect from you and your team if awarded.
Bid on Performance, Not Price.
When contractors are ready to grow their business, many decide to lower their bid price in order to win more bids. Unless your profit margin is so exceptionally large that it is unreasonable, don’t sacrifice your margin for bid wins. The GC cares about the price of your bid only once they KNOW you can perform. Performance and trust are the key for the GC and a smart bid focuses on performance way more than the price.
Far more common is that your profit margin is barely enough to support the project, let alone fuel any potential growth. Cutting margin to win a project is undercutting your chances for success on the project and crushing any chance for growth. Don’t forget – it’s about growing your business not winning one job!
Your first action item for smarter bids, then, is to know what your profit margin needs to be. Next, figure out your win rate. If you win 10% of the jobs you bid at a profit margin of 20%, don’t lower your margin. Bid MORE jobs at the same margin!
The additional jobs you win should fuel your growth strategy.
This strategy relies on confidence, as we mentioned earlier. You need to confidently and clearly show WHY your costs are what they are and how your team’s special blend of skills, experience, and culture are worth your bid price.
Bid More, but Don’t Bid on Everything.
Bidding on jobs with problematic schedules, very little room for profit, or that are being handled by a GC with a reputation for late payments, can actually cripple your growth plans. Don’t take on busy work that has your team spinning its wheels. Taking too much risk for one job is not worth ruining your business or setting it back a year.
This is where the first two tips come in handy. With a solid bid template and bid strategy in place, you can use bidding platforms to see the projects first and produce solid, performance-driven bids faster than the competition.
Better Construction Bidding is Part of Your Growth Strategy
Construction bidding isn’t just about winning; it’s about what that win means for your company. When it comes to growth, that means bidding more and bidding smarter so that you can continue to perform the excellent work you’ve built your reputation on AND power the growth goals you set for your company.
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Cash flow is one of the most important factors of your construction company’s success. Good organizational cash flow management provides financial security for today and the stability to grow in the future. Cash flow also impacts performance. Specifically, the cash available for a project has a direct impact on your team’s ability to do its best work.
Start New Projects the Right Way
One of the biggest challenges commercial construction subcontractors face is the cost of starting new work. Thirty days before you submit your first pay app, your company will have to pay for labor, materials, supplies, equipment, bonding, insurance, and other costs. If you are paid on time, you still wouldn’t recoup any of those expenses for another thirty days. Knowing the issue with slow payments in construction, it is safe to assume you will wait even longer than that.
The upfront cost of new work requires you and your team to make some hard decisions about labor, materials, and other expenses. There is a better way — project cash flow management.
Download Our Free Cash Flow Tracker
Don’t forget the instructions.
Manage the cash sources and uses of each project just like you would your overall business. Estimate the project’s capital cycle as part of your bidding process to determine exactly how much cash you will need on hand to start a project with the optimal amount of workers, materials, and so on.
Estimating project cash flow can also help you make a better decision about HOW you will finance the start-up costs. If you are not using free capital (cash on hand not reserved for other expenses), you can research your best financial solution. Whether you choose a bank line of credit or a commercial loan product like ours, you can build the cost of financing into your bid.
And whatever you choose to finance new work, PLEASE read this before choosing a Merchant Cash Advance.
Avoid Delays with Good Cash Flow Management
The majority of delays in construction are due to cash flow. Can’t fund payroll? That’s a cash flow problem. Not enough funds to rent the Big Crane? Cash flow problem. Hurricane rips through town and destroys the site? Okay, that one is not a cash flow problem.
Forecasting your project’s weekly cash flow will help you spot the “danger zones” — the weeks cash is tight, your nervous about making payroll, and/or you spend the week chasing down people that owe you money. Spotting those danger zones in advance allows you to proactively manage them before they are a problem and gives you the chance to come up with solutions in a much more controlled and less urgent manner. There are lots of proactive solutions: explore your financing options, negotiate different terms with your suppliers, or discuss the schedule with your General Contractor.
That’s right — talk to your General Contractor. About money. Seriously. Listen, your GC wants you to do your best work so they have a successful project. You share a common goal. Bring an issue to them proactively, with an idea of how to solve it, and they are more likely to thank you than judge you. Bring them the same problem when it is in the middle of the job and it’s a different story.
And if they give you grief, send them our way.
Do More Work and Do it Better
Cash flow management allows you to make strategic decisions regarding your company. Where do you want to be in a year? Data will not only show you if you need to make changes in the company, such as reducing overhead, but also which types of jobs are most profitable for your company and should be on your target list for growth.
With good project cash flow management, you’ll also know you can take on those new projects, how much cash you’ll need to do them right, and how you will finance those expenses. And that may be the greatest benefit of cash flow management — the confidence that your company is secure, successful, and growing.
Ready to change the way your team performs? Answer 3 questions to start your application today!
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Mission, vision, core values, and purpose statement — there’s a lot to unpack when you’re transforming your business into one driven by purpose, not just profit. Each of these statements will be one piece in your overall business strategy, along with your key products or services, financial goals, and the activities you will undertake to achieve them. We’ve already discussed how to identify your company’s purpose and draft a Purpose Statement. Today let’s dive into defining your company’s core values and how they work to inform all the other pieces of your business plan.
What are Core Values?
Core values are not a “soft skill” marketing exercise. They are the essential principles of your organization; they are the beliefs that you will use to guide ALL company decisions. Your values should dictate the behavior of your team and leadership. Think of your corporate core values like the values you keep at home and instill in your children. In fact, your company’s values need to start with YOUR values. You are the head of this “family,” and it is up to YOU — your actions, decisions, and even the words you use to communicate — to lead through example.
Think about the values you instill at home. If you say to your kids, “We tell the truth in this house, always,” then honesty might be one of your core values. If you believe in the “pay it forward” philosophy at home, you can extend that altruism and generosity into your company’s culture.
You need to decide what you, ultimately, stand for, and what you will NOT stand for. Those are your core values. They should grow to become the values of your company.
One more thing about core values — you need team buy-in. Which means, they need to look at the core values you’ve laid out and say, “Yes, this sounds like how we operate” or “Yes, this is something I want to stand for and be a part of.” If your core values aren’t true to you, or if they don’t extend to how you manage your team and your business, your team won’t believe in them and they will become empty, meaningless marketing jargon.
Take a deep breath, this part may be difficult. It is possible, even likely, that not every member of your current team will embrace your core values. If you start a business with strong values from the beginning, you can hire a team directly aligned with those values. When you are introducing core values to an existing team, however, you need to be ready for the fact that not everyone will accept them. Some may choose to leave, or you may need to help them find a position with another company that is a better fit for them.
Core Values in Your Business Plan
Your core values are just that — the CORE of your company’s identity. They need to be the foundation of your business strategy, so it makes sense to include them in your business plan. Ideally, right at the beginning.
Don’t confuse your mission statement or vision statement with core values. Your mission statement is a statement of what your company already does. Your vision statement is a big, aspirational goal for your company. Core values dictate what your company will do, and what it won’t do, to achieve your mission and your vision.
Not sure where to start? Here are a few tips for writing corporate value statements:
- Keep them short. Too many core values become confusing and hard to remember in moments of conflict or stress (when you need them most). Keep your list between three and five.
- Keep them simple. If you need 300 words to explain a value, go back to the drawing board. Core values are convictions shared by you and the entire team. They should be easy to grasp and remember. Think in bullet points, not paragraphs.
- Keep them specific. Your core values should be more than one generic word. Spell out exactly what the value means to your organization, in clear, simple language.
As you construct the rest of your business plan, keep your values at the front of your mind. If one of your core values is “We give, serve, and love our community” then you should consider baking into your business plan a community outreach model. If one of your values is “We believe work and fun in equal measure delivers great results” then you should keep in mind culture initiatives as you build out your company’s practices and operations.
The Benefit of Corporate Values
Your corporate values will make or break your reputation. People will want to work with you, and FOR you, if they know your values are more than lip-service. In construction and manufacturing especially, business success is built through strong relationships.
It is easy to look around and think, “Values don’t matter. PRICE matters.” Don’t be fooled by this short-term thinking. If you engage in unethical practices to win business, or sacrifice quality to cut costs, your TRUE values will show themselves, your reputation will be built on those actions, and your customers will soon be looking for new partners.
Ethics matter. Values matter. Relationships matter. What you say matters. A low-price is only attractive until you see what it gets you.
You build your reputation by setting an expectation and living up to it. Share your core values with prospective clients and new team members so they know what to expect from your company. Then, do the work to meet those expectations. Let’s say you are a manufacturing company and “Accountability” and “Honesty” are two of your corporate values. Your customers should expect that your team owns every project from start to finish, and that they communicate transparently regarding price, schedule, changes, or challenges. Do that successfully, and you will build a reputation for being a manufacturing partner customers can count on and trust.
Herb Keller, the CEO of Southwest Airlines, explained the relationship between core values and business success like this, “We always felt that people should be treated right as a matter of morality. Then, incidentally, that turned out to be good business too. … We said we want to really take care of these people, we want to honor them and we love them as individuals. Now that induces the kind of reciprocal trust and diligent effort that made us successful. But the motivation was not strategy, it was core values.”
Your core values should be a public promise to everyone impacted by your company — customers, employees, partners, vendors, community, and so on. Live up to that promise and your company will reap the rewards of business done right.
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Low profit margins in construction have been an issue for decades, and even as we climb back toward normalcy following the shutdowns caused by the coronavirus, there are few signs if any that profit margins will increase with increased demand. In fact, most contractors seem to expect the opposite. According to the Associated Builders and Contractors Confidence Report, contractors expect sales to grow over the next six months. Over half of the contractors surveyed said they expected some level of growth. Ironically, only about 30% expected profit margins to increase, while 35% expect them to drop.
Why are construction profit margins so low, and continuing to shrink? And, perhaps more important, what can you as construction business owner, do to protect your margins?
Why Are Construction Profit Margins Low
There are several economic reasons for low construction profit margins. The highly-fragmented nature of construction naturally spreads money thin; potential profit margins cover several different trades all working on the same project. There has also been historical cost and labor inflations, eating up profit on every project. There are also higher material costs right now.
The rise of remote work options post-pandemic has had an impact on commercial construction. There is less demand for large, urban headquarters, less parking lots, and less development around these work hubs. The decline in projects across the industry resulted in fiercer competition, driving prices (and thus, potential profit) lower.
Finally, contractors have played a role in their own low margins. Contractors regularly bid on low-profit jobs, hoping that their performance will win them the next contract at a better margin.
Pause right there. Think that through. If you bid and win a job with a 15% gross margin, and the project requires 10% retainage, then you only have a 5% profit margin to operate the job. Yes, the real margin is 15% (and not 5%), BUT what good is that profit for your business right now if it is tied up in retainage and you won’t receive it till the entire project is over?
Will a 5% positive cash flow even be enough to support your team throughout the project so they actually can deliver their best performance?
Chances are the answer is NO. So, let’s focus on getting you the profit margin you actually need in order to perform.
Tips to Increase Construction Profit Margins
Know Your Actual Profit Margin
Let’s start with the basics: you need a system to accurately calculate your expected profit margins before you can start to improve them. You also need to know which types of jobs resulted in high profit margins, and which nibbled away your profit to crumbs.
One of the key data points in estimating profit margin is overhead, which leads us to Tip #2.
Adjust for Actual Overhead in the Bid
This is probably one of the simplest tips to increase your profit margin. Contractors who guess at their overhead costs are operating at a disadvantage right from the start. A 2019 study from the Journal of Building Engineering revealed that 44% of the 2700 projects examined actually experienced a loss after adjusting for overhead. This is just not acceptable and should not happen. Overhead costs (insurance, rent, utilities, staff salaries, etc…)are all real costs just like labor and materials – they should never be left out or a “best guess.”
Hire a CPA or Controller or BOTH
Do you know your company’s Gross Profit, Operating Profit, Pre-tax Profit, and Net Profit? Do you have a breakdown of historical job costs and margins? Do you currently run an AR Aging Report to know which customers you absolutely have to track down and get their accounts squared? Do you have a daily cash report that shows you precisely how much cash you have and what it needs to be used for? A CPA can help with ALL of that.
In construction, you should also have a CPA that knows construction – there are plenty of them out there and using one that knows your industry, works with customers already in the space, and how to help you manage through it is critical.
Bid More, Bid Smarter
While working jobs just to have revenue coming in at the expense of profitability is a bad idea, if you want to consistently earn a certain profit margin on every job you are going to have bid more jobs. Utilizing a service like ConstructConnect can give you access to more jobs in your area, as well as estimating tools and streamlined bidding dashboards.
Bidding more jobs has an additional cost associated, and a service like ConstructConnect can also help you lower your cost to bid, which can also help increase your profit margin.
Work from a Place of Abundance
This is a mindset shift, not a tactical strategy. Earlier in this article, we asked if a 5% profit margin was enough to support your team throughout a project. Our CEO calls this “working from a place of scarcity.” When you work from a place of scarcity, you feel stress. Your team feels stress. The GC probably feels your stress, too. You can’t truly do you best work, because you are operating at a disadvantage.
Here’s the shift: Operate from a place of abundance. Know the baseline profit margin you MUST earn in order to complete a project the RIGHT way. Then, bid on more of those jobs. Don’t be afraid to have a higher price than competitors. You may not win them all, and that is okay. You will be focused on performance, not price, and the results will show in your work. And over time as you execute those jobs and finish them those same results will show up in your bank account and your stress level!
Make Performance Your One KPI
Nothing should matter as much as performance. To create greater accountability within your team, link financial incentives to project goals. Empower your team leaders to own the performance on the entire PROJECT, spotting potential efficiencies as well future issues in advance, and bringing them to the GC. Not only will the project go more smoothly, but you will be creating a legacy of trust, accountability, and great work. That reputation alone will bring you more business than any other single thing you do.
Know Your Financing Options
Most subcontractors struggle to cover the upfront costs associated with new work. Before you jump on a Merchant Cash Advance or take out a personal loan, research all of your available options for financing. This research should take place BEFORE you win the contract, so you can absorb the cost of financing into your bid and preserve your profit margin. Not all money is the same and not all costs are the same – structure of the loan, the amount, how you use it and what you can use it on all matter!
Construction profit margins are notoriously low compared to other industries, and experts suggest they are going to drop lower before they get better. Savvy contractors will weather the downturn by knowing what they absolutely have to make on each job in order to survive, and then ensuring they get it every time.
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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 cash flow 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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To transform your company into a purpose-driven business, you need to become a purpose-driven leader. A purpose-driven company aligns its business goals to an external goal or mission. Success and purpose live hand-in-hand for these businesses, which tend to experience faster growth, enjoy greater camaraderie, and deliver better customer experiences.
A company’s purpose has to be authentic to its leader, the person who will nurture and sustain that purpose as it disseminates throughout a team or organization. Defining your leadership purpose can also help you become a better leader. Purpose-driven leaders exhibit characteristics such as self-awareness, flexibility, confidence, and innovation.
This year, we are on a mission to help as many business leaders as possible transform their business into something MORE—a vehicle for personal fulfillment, community outreach, philanthropy, civic action, WHATEVER your purpose is.
It starts by finding your leadership purpose.
Finding Your Leadership Purpose
When pressed to define their purpose, many executives and business leaders will say something akin to, “To ensure my team’s success” or “To best activate strategies that result in achieving our planned objectives and goals.”
Those are NOT your purpose. They are important aspects of the role, but they are not WHY you get up in the morning and go to work. This is especially true if you are the owner of a small business. You didn’t decide one day, “I’m going to start a textile manufacturing company so I can achieve planned objectives.”
You also didn’t start your business just to make money. You did it for something BIGGER than that. To feed your family, to make your parents proud, to stay out of trouble, to offer a better product to customers or a better work environment for your employees. Start here. WHY you started your business is a great place to mine for leadership purpose. If you fell into your business on accident or by circumstance then why did you stay in it?
Now, what about that “Why” energized you enough to go through the challenges of starting and running a small business? What fed your fire, kept you going when times got tough? Was it offering a job to people who deserved a second chance? Was it watching your kids’ college fund steadily growing? Or was it opportunities to clean up and beautify neighborhoods in your small town?
These exercises will help you get to the heart of your purpose as a business leader.
Create a Purpose-Driven Leader Statement
There is an undeniable psychological impact to writing something down. When you know your leadership purpose, give it the weight it deserves by writing it down. Don’t smother your leadership purpose in business-speak. This isn’t a company Mission Statement; this is your Leadership Manifesto.
According to Harvard Business Review, Dolf van den Brink, the CEO of Heineken USA, declared his purpose statement as: To be the wuxia master who saves the kingdom.
He’s a big kung fu movie fan. He is also a fan of taking action in high-risk situations. This kind of dramatic purpose statement feeds your energy to do the hard work your role requires, whether that is the risk-taking action hero or the wise, diplomatic team-builder.
After you have written your purpose statement, describe how that purpose will help your company succeed. Set goals that utilize your purpose and move your company forward. Having a roadmap will help you harness the power of your purpose and transform it into meaningful action.
Now you know your value as a purpose-driven leader in your organization. The next step is to expand that purpose into an Organizational Purpose Statement. More on that soon!
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