Rising manufacturing costs are affecting manufacturing companies of all sizes. Many business owners solve for this through capacity reductions, plant closures, and layoffs. These are effective but drastic measures to increase working capital. There are cash flow management strategies that can increase your available working capital and improve costs of production.
First, let’s define manufacturing costs and production costs. Then we can break down how cash flow management can increase working capital. Finally, we’ll show how working capital can actually improve your manufacturing company’s production and manufacturing costs.
Expenses directly associated with the manufacturing of a product are classified as manufacturing costs. Manufacturing costs are all costs incurred in order to produce an item, but not the costs associated with operating your business. For example, direct labor is a manufacturing cost and would include the salary for your plant foreman, but would not include the salaries for your leadership or administrative personnel. These are considered indirect overhead costs.
Production cost is defined as all costs associated with the business’s output. This includes overhead costs such as rent, utilities, equipment maintenance, and factory personnel salaries not directly associated with manufacturing product.
Consider production costs like this:
Direct Material Cost + Direct Labor Cost + Factory Overhead = Production Cost
Cash flow management increases working capital
Cash flow management is recording how money comes in and goes out of your business. Cash flow management helps you identify trends and opportunities for savings, as well as forecast cash flow gaps well in advance.
It all starts by tracking your cash flow.
You can’t effectively increase your working capital until you can analyze accurate information of your cash flow. How and when does money come in, and where and when does it leave? You can track your cash flow yourself using accounting software like Quickbooks, but we encourage all of our clients to hire a CPA. A good accountant will help you find ways to save money and free up working capital. Don’t think of a CPA as an outside vendor expense; consider them part of your growth team.
Once you have a record tracking cash flow data, you can start to analyze it and forecast your cash flow. Are direct material cost increases eating away at your profit margin? A cash flow tracker will show that. Are your overhead costs out of line with your company size and revenue? A cash flow tracker makes that clear.
A good understanding of your company’s cash flow can also reveal gaps in cash flow and help you spot solutions. Can you decrease your payment wait time? Is there an option to save on materials? Those kinds of decisions impact your organizational cash flow, as well as each new customer order.
Speaking of new customer orders, every new order comes with new costs. A cash flow tracker can help you estimate what those costs will be, when you will incur them, and how long you’ll have to wait to recoup the cost of onboarding that new customer by getting paid. Financing the short-term cash flow pinch that comes with a big new order keeps your working capital free. It also allows you to pay for materials upfront, which can be used as leverage for a discounted price. There are many financing options available to manufacturers. To learn more about our PO and WIP financing, check out our Manufacturing Funding page by clicking here.
How working capital can improve manufacturing and production costs
Reducing wastes and cutting costs through good cash flow management can help increase your working capital. Now, let’s look at how that free working capital can improve production costs.
Diversify your suppliers. Invite quotes from as many suppliers as possible. Your vendor relationships should be about more than price, but price does play a role. Keep a list of suppliers you know you can count on, and estimate in their costs before you quote a new order. With the massive stress in the supply chain purchasing your materials can be a huge challenge to business right now. Access to working capital ensures you have the materials you need to execute your customers orders and keep your plant running efficiently. It can also increase your ability to get to the “front of the line” with your suppliers to get what you need.
Negotiate discounts. Access to free working capital puts you in a great position to negotiate. Most suppliers are willing to trade a discount for an early or cash payment.
Repeat these steps with transport vendors. Research transport companies that will help you unload raw material into the factory. Many local transport companies offer this option, while “big name” transport companies may not or charge extra.
Increase efficiency through managed maintenance. Working capital can be used to invest in machine health monitoring and predictive maintenance techniques. When a plant monitors itself, there are fewer shutdowns and repairs tend to be less expensive, bringing down your overall production costs.
These are just a few ways that access to working capital can improve your company’s manufacturing costs. As we move past the coronavirus pandemic shutdowns and into a renewed phase of productivity, cash flow management, lean manufacturing practices, and access to working capital will give some manufacturers a lead position in the race for growth.
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Manufacturers often evaluate supplier and vendor prices, but how often are you checking your vendor relationships? A solid vendor relationship can be more critical to your manufacturing company’s long-term success than a vendor’s price. And here’s the really good news — unlike pricing, there’s a lot you can do to create great supplier and vendor relationships.
Communicate early and often
If the coronavirus pandemic taught us one thing, it was that people enjoy face-to-face communication. If you can’t regularly meet your vendors and suppliers in-person, schedule regular video calls. At the very least, a phone call lets you and the vendor hear each other’s voices and get to know each other much better than email.
If you’re only calling your vendor or supplier when something has gone wrong, you’re building the relationship on need, conflict, and stress. That plays out on the vendor side, too. A vendor that only hears from you when things go wrong might hesitate if they receive a purchase order from an unfamiliar name. They don’t want additional trouble in the relationship. From your perspective, you don’t need the delay while they are waiting for confirmation.
Adopt a proactive approach to supplier communication to build trust and confidence. Let your supplier know in advance when you’re expecting a large order to come through. Introduce them to new team members who may be interacting with them, and update them early if leadership is changing. Inform them of any business hour changes or office closures. These updates make your suppliers feel like they are more than just a vendor; they are an important part of your team.
Treat suppliers with respect
When a customer has unreasonable expectations, how does that make you and your team feel? Stressed? Tense? Resentful? Guess what — your suppliers feel the same way. Unrealistic demands feel like a no-win situation for your vendors. Yes, there will be emergencies, but before you press for an urgent turnaround make sure that this actually is an emergency. If you treat a vendor with respect, they are more likely to want to help you out when that real emergency happens.
Contracts may not feel like an important part of relationship management, but the truth is that contracts create a basis for trust and communication. Your contracts should clearly establish the performance, service, and payment expectations. Communicate clearly, follow-up to clear up any ambiguity before the contract is signed, and then honor what you have both agreed to.
Gratitude is the name of the game for supplier relationships
Everyone likes to feel appreciated. Show your suppliers how much you appreciate them with unexpected thank-you moments. For example, at Mobilization Funding, we sent custom Yeti mugs to our strategic partners as a fun and personalized thank you. Here are a few simple ways to show you appreciate your vendors:
- Say “Thank you” at the end of every call
- Send your vendor contact a birthday card
- Send holiday cards with hand-written notes and signatures
- When a supplier does you a favor, send them a thank you gift
Treat vendor relationships like customer relationships
Yes, technically you are the customer in this situation, but in industries like manufacturing it helps to treat everyone like they are your customer. (Hopefully, you have already nailed customer experience in your business!)
Just like building a good customer relationship, a solid supplier relationship is built over time. It takes hard work on both sides, clear communication, and unexpected moments of gratitude and delight. Challenges are inevitable in any relationship; make sure you have made enough deposits into the relationship before you start trying to take from it and always take more than you give. Putting the work in changes the nature of your vendor relationship — from a procurement, transactional relationship to a mutually beneficial partnership — and ultimately can help your business establish a positive reputation among suppliers and reach your goals with less stress.
At Mobilization Funding, we specialize in financing options for manufacturing companies. Our Purchase Order financing gets you the money you need to pay your suppliers (and other project costs) and get to work BEFORE you send the invoice. Learn more on our Manufacturing Funding page.
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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A Service Level Agreement (SLA), the agreement between you and your customer on what each can and should expect from the other, is central to meeting customer demands and expectations, and working capital is essential to meeting the SLA parameters. Working capital represents the assets or cash flow available to make payroll, pay suppliers and cover other production expenses. While working capital has a tremendous impact on a manufacturer’s ability to meet a customer’s SLA, the two are rarely discussed in the same conversation. In part, these conversations are siloed by the two departments that manage them — finance or accounting and operations, respectively. When you bring them together, however, you can immediately see how working capital can help your manufacturing business meet your customers’ service levels.
The importance of a service level agreement
We live in an instant-gratification world, and this “I want it when I want it” mentality has already moved beyond same-day Amazon drops and into business relationships. Manufacturers need to ensure they can meet customer demands quickly, which also means their suppliers must be equipped to meet the manufacturers’ demand for raw materials.
A service level agreement ensures the manufacturer and the customer are on the same page. The SLA covers expectations regarding pricing, batch or order sizes, timelines, minimum quality standards, and more. A comprehensive SLA between your company and all of your customers allows you to determine the ready rate and safety stock needed to satisfy a customer order from stock on hand. If your company manufacturers custom products based on customer orders, an SLA helps determine the expected order cycle and the lead time you and your suppliers need to meet that cycle.
The importance of working capital management
Working capital is one of the biggest challenges manufacturers face, and recent escalating costs have only made it more critical. Manufacturers face cash flow challenges regularly as their industry’s business model is built upon supplier and production expenses being accrued well in advance of goods being sold to customers. Additionally, many customers have extended payment terms — or simply don’t pay on time — compounding the issue for manufacturers.
When your current assets minus current expenses equals a negative number, you have negative working capital. Negative capital is one step away from cash flow problems, and cash flow is one of the top reasons manufacturers (and all other small businesses) eventually collapse. Working capital management aims to spot these cash flow issues early and resolve them in advance.
How working capital management leads to better service level compliance
Available working capital allows manufacturers to plug the gaps in cash flow caused by production costs at the start of a new project as well as those caused by slow-paying clients. In addition, freely available capital (cash on hand not already allocated to an expense) can be used to make smart, strategic decisions that improve service level compliance. This may include buying materials from additional suppliers to increase the stock on-hand for a rapidly re-ordering customer, shortening the lead time between an order and fulfillment.
Working capital can also be used to improve quality through changes in suppliers or in the operations on the floor of the plant. Finally this capital can be re-invested into the company for digital transformation, equipment maintenance plans, new hires, and more.
Need access to more working capital? Check out our PO Financing and WIP Financing solutions, created with manufacturers like you in mind.
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 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.
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!
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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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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Are you ready for your business to do more? To become a true leader for your team? To build camaraderie and loyalty and drive success through your team’s aligned efforts? If you answered Yes, you are ready to transform your business into a purpose-driven company.
If you answered No, keep reading. Purpose-driven companies tend to grow faster, attract and retain better talent, and exceed customer expectations more often than their counterparts.
That sounds good, right? Because it is!
What is a Purpose-Driven Company?
A purpose-driven company aligns its success to a greater mission or goal. This alignment starts with a clearly articulated Purpose Statement that everyone in the company understands. Your Purpose Statement is WHY your company exists, beyond the obvious goal of being profitable. For example, our Purpose Statement at Mobilization Funding is, “To help the people we come in contact with.”
A Purpose Statement is more than a feel-good moment in your company handbook. It should guide your business strategy and inform your team’s actions.
That’s a lot of heavy lifting for one sentence. To shoulder the weight effectively, your Purpose Statement must be crystal-clear. Your team should be able to recite it from memory. It also needs to resonate powerfully with everyone in the company, starting with YOU and all the way down to your newest employee.
Creating your Purpose Statement isn’t easy, and the deep-dive, soul-searching it requires of you as the business owner could be a blog in and of itself (and will be). Here is a hint to get your started – your purpose statement needs to come from what is really in your heart. It must be about serving your customers and your team FIRST. If it is all about what you want it will not be nearly effective enough or something your team or customers will embrace and follow.
For now, let’s talk about WHY you should align your company’s efforts around a shared purpose.
Becoming purpose-driven is a journey. Don’t go it alone. Subscribe to our CEO’s newsletter for tips and insights from his own purpose-driven journey.
Why Become a Purpose-Driven Company?
According to a Deloitte Insights Report, “Purpose-driven companies witness higher market share gains and grow on average three times faster than their competitors, all the while achieving higher employee and customer satisfaction.”
Attitudes about brands are shifting. More and more customers want to know WHO they are doing business with, and this trend is not restricted to B2C industries. Whether you sell directly to consumers or business-to-business, your clients and customers want to know who you are and what you stand for.
Having a stated company purpose tends to increase team morale, collaboration, and productivity. Once your entire team is marching to the beat of your purpose, it becomes easier to identify, attract and retain new employees who also believe in your purpose. It also makes everyone’s job clear and easier because the purpose is understood. It guides each and every person’s decisions.
Loyalty, from both customers and workforce is, a forceful growth agent. Happy customers who align with your purpose become vocal brand evangelists, and a team joined around a common goal is willing to push harder to achieve it. Your purpose is a powerful differentiator for new business as well, and when you get the big job you’ve been dreaming of, you know you have the team to get it done.
Examples of Purpose-Driven Companies
What does a purpose-driven company look like? Well, we are one, for starters. Here are a few slightly more famous purpose-driven companies:
CVS. Remember in 2014 when CVS stopped selling tobacco products? That revolutionary and controversial decision was guided by their stated company purpose, “helping people on their path to better health.”
The decision wasn’t made lightly, and it wasn’t made in a silo. Leaders from almost every department discussed the potential ramifications. In the end, CVS took a $2 billion loss in annual cigarette sales in order to live its purpose.
It paid off. The company ultimately ended up with a 10 percent revenue increase.
TOMS Shoes. This shoe-maker combines purpose with profit. For every pair of shoes purchased, TOMS donated one pair to a child in a developing country. TOMS has since shifted from this one-for-one model, but continues to directly aligns sales with its purpose. For every $3 the company makes, it donates $1.
IBM “Smart Cities.” The tech giant’s purpose to advance innovation led to the creation of the Smarter Cities Challenge, which has helped over 100 cities so far solve complex environmental, infrastructural or social challenges. It also drove revenue for IBM, as part of the Smarter Planet campaign, which generated over $7 billion in revenue.
2021: Your Year of Purpose
We are launching a campaign this year to help as many construction, manufacturing and other businesses as possible make the transformation to be purpose-driven companies. Why? It’s part of our purpose — to help those we come in contact with. We know the fulfillment and pride that comes from being purpose-driven. We want you to feel it, too!
Join us in making 2021 your Year of Purpose. Subscribe to our newsletter and we will walk through this journey together.
You are going to dig deep to find and define the true purpose in your work. You will scrap those meaningless core values created in a boardroom and replace them with values true to YOU. You will carve a path for your team to follow. You will LEAD them toward your vision for the company.
We can’t wait to see what you become.