Is Growth Crippling Your Business?

“Greed, for a lack of a better word, is good.  Greed is right.  Greed works.” is one of the most famous lines in movie history courtesy of Gordon Gekko.  I have heard so many contractors talk the same way except their focus is growth.  Contractors thrive on the concept of growth.  For some, it is their sole focus.

Construction company owners are very entrepreneurial people.  They thrive by taking calculated risks.  Growing revenue is a sign of achievement and source of pride for many owners.  The common thought process is that if I can double my revenue, I will double my profits.  It is a very simple math problem.  My revenue doubles.  My cost doubles.  My profits double.

Contractors are often unaware that the most dangerous time in a company’s development is during a period of rapid growth.  Most are under the common misperception the greatest risk to their business is when revenue is falling.  How can growth be bad for a company?  Statistically, the failure rate of construction companies is 3 times greater during an economic expansion as opposed to a downturn.  Unrealistic growth plans are the number 1 cause of contractor failure.

Generally, growth is good.  Planned growth is a time tested, excellent business strategy.  When expansion is accidental and adequate plans are not in place, growth can put you out of business.  Why?  Growing your business eats away at your cash flow.  Cash flow is the life blood of any contractor.  Many contractors never realize how much cash flow is used to finance a growing company.  When a company does not have the balance sheet to support the cash flow, contractors have to seek financing from their bank or worse yet, their bonding company.

When a company is growing, the uncollected receivables will rise putting more pressure on the company’s cash reserves.  Contractors universally tell us it is getting harder and harder to secure timely payment from owners, general contractors, and prime subcontractors.  In a growth mode, your expenses will dramatically increase; however, some expenses such as payroll and overhead cannot wait until the receivable is collected to be paid.

When you are expanding your business, shortages of key materials and labor are much more likely to appear.  The additional labor needed to execute more work also tends to be less productive than your seasoned labor.  Less productive labor is a key factor in cost overruns that can dramatically affect your bottom line.

How are you growing?  Are you focused upon performing more projects?  Is your growth a factor of doing larger jobs?  Are you seeking to expand your geographic footprint or moving into a new area of work?  All of these are valid strategies but the risks are very different.

The difference between success and failure is planning.  Cash management is key.  Most contractors do not get paid for 90 days or more from the time of the invoice.  How much labor will the company have to advance?  What type of credit terms can you arrange with your supply houses?  How will your overhead get funded?  Will you need to expand your overhead to manage your growth?  These are some of the most important questions to consider when taking on more backlog.

The very best contractors focus their attention on profitability and managing cash flow.  Is a receivable does not get paid when expected, where will the necessary cash flow come from to meet your operational needs?  The very best contractors are able to anticipate how much cash they will need to finance their growth.  A best proactive is to have a pro forma cash flow projection done.  Be realistic and conservative in your projection.  Cash needs are almost always more than first thought and contractors seem to be getting paid later and later.

A key factor in financing your growth is having the necessary credit arranged in advance.  Begin discussions with your banker as early as possible to have the necessary availability on your line of credit.  Bankers are always more receptive to a client’s need when the client gives them a clear plan of its shore term borrowing needs and the corresponding repayment plan. Additionally, the contractor should have a long discussion with its bonding agent to address its bonding program.  Will bonding be an issue?  It is always better to have this discussion in advance as opposed to submitting a bond request to have it declined.

Growth can be great for a business or it can be the reason for a contractor’s downfall.  How you will finance your growth separates the best contractors from their competition.