FOUR MERCHANT CASH ADVANCES. THEN DEBT .
A $3.4M civil subcontractor had grown fast and financed the growth with four stacked merchant cash advances, overhead at 32 percent, and gross profit at 5 percent. We rebuilt job costing, restructured overhead, and pursued $245,000 of uncollected receivables. The advances were eliminated, overhead dropped to 15 percent, and gross profit reached 33 percent.
This owner had done what the market rewards, which is win more work and grow, and the growth is what nearly ended the business. Each merchant cash advance was taken to cover a shortfall the previous one had created, until four of them were drawing daily against the operating account. Overhead had crept to 32 percent of revenue while gross profit sat at 5 percent, so every additional job made the position worse rather than better. The work itself was fine. What was missing was a job cost record that could tell him which jobs earned, an overhead rate anybody had recalculated, and a collections routine that ran on a schedule.
A $3.4M CIVIL SUB. GROWING AND DYING.
A civil subcontractor doing $3.4M a year, self performing earthwork and underground utility scopes for regional general contractors. Revenue had grown every year for three years, the crews were experienced, and the customer relationships were solid. The owner was paying lenders before he could pay himself, and he described the business as busier than it had ever been and closer to failing than it had ever been.
PAYING LENDERS FIRST.
Every Monday started with a decision about which of four lenders would be paid and which vendor would be told to wait. The advances drew automatically, so the money left before he could plan around it, and the daily draw meant the account balance was never a number he could make a decision from.
He couldn't tell which jobs made money. Some finished feeling good and some finished feeling terrible, and the profit and loss at the end of the year was the only document that described any of it. When a general contractor pushed back on a price, he had nothing to hold the number with, so he cut it.
Roughly $245,000 was sitting in receivables that nobody was calling about, because the weeks were spent covering the shortfall instead of collecting what caused it.
OVERHEAD AND COLLECTIONS, NOT PRICING.
The chain ran from an uncalculated overhead rate into underpriced bids, from underpriced bids into a thin gross margin, and from a thin gross margin into borrowing against receivables that were never collected on a schedule. Every link had been treated as a separate problem and every fix had been a financing decision.
The two modules that weren't running were the Job Profitability System, since the job cost record couldn't compare a job to what it was bid at, and the Cash Flow Cycle System, since nothing in the business was responsible for collecting on a defined week. The merchant cash advances weren't the problem. They were what the two missing systems had made necessary.
WHAT CHANGED, WEEK BY WEEK.
THE NUMBERS, NOT THE FEELING.
Gross profit moved from 5 percent to 33 percent without raising a single bid, because the margin had been there and was being consumed by overhead and by the cost of financing uncollected work. The business is on track to be completely debt free.
Total time from first call to the last merchant cash advance being cleared: about 12 weeks. The overhead reduction and the gross profit correction held through the following year.
DOES THIS SOUND FAMILIAR?
Contractors in this position tend to share the same four things. Revenue has grown every year and the bank balance hasn't. There's at least one financing product in the business that was taken to cover a shortfall and not to buy an asset. Nobody can say which of the last five jobs earned the most. And the receivables aging has invoices on it that everyone has stopped bringing up.
If two or more of those describe your business, it's very likely the same chain rather than a pricing problem, and the order of the fix counts for more than the size of it.
See how CFOS applies to civil subcontractors specifically on theCivil Operating System page, or book a 20 minute call and bring your own numbers.
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