OVERHEAD AT 30 PERCENT. THEN 17.
A $6.7M contractor had a $348,000 line of credit maxed out and overhead running at 30 percent of revenue. He knew something was off and couldn't see where the money was going. We cut overhead from 30 percent to 17 percent and put a collections process in place. $309,000 was in the bank within 30 days, the $348,000 line of credit was fully paid off within 60, and the owner paid out $65,000 in bonuses.
Overhead at 30 percent of revenue hides well, because it's spread across a dozen accounts and no single one of them looks unreasonable on its own. What kept it invisible here is that nobody had put the total next to what a contractor at this revenue and this trade should be carrying, so a third of every dollar going to overhead read as the cost of doing business. The line of credit was the second half of the same problem. Money that should have come in from finished work was borrowed instead, the balance never came down, and the interest on it became one more overhead line the jobs had to carry.
A $6.7M GRADING SUB. MAXED LINE OF CREDIT, NO IDEA WHY.
A contractor doing $6.7M a year with capable crews and enough work in front of them. A $348,000 line of credit was maxed out and had been for some time, and overhead was running at 30 percent of revenue. The owner knew something was off in the business without being able to point at what it was, which is the most common sentence said on a first call.
HE KNEW SOMETHING WAS OFF. HE COULD NOT SEE WHERE.
The line of credit was full. It was funding the business rather than buying an asset, so the balance never came down, and the interest on it was one more cost every job had to carry before it earned anything.
Overhead was 30 percent of revenue. No single account inside it looked wrong. Spread across a dozen of them it took nearly a third of every dollar before a job could contribute, and nobody had ever put that total next to what a contractor this size should be carrying.
Nobody owned collections either. Invoices went out and then waited, and the waiting was funded by the line of credit, which is why the two problems were really one problem seen from two ends.
OVERHEAD AND COLLECTIONS, ONE PROBLEM.
Overhead has to be funded every month whether or not the money from finished work has come in. When it hadn't come in, the line of credit covered it, and the line of credit never got repaid because the next month worked the same way. Cutting the overhead reduced what had to be funded and collecting on a schedule produced the money to fund it, so both were done at once rather than in sequence.
The Trade Benchmarking System was the system that wasn't running. An overhead rate can only be judged against what a trade and a revenue band carry, and without that comparison there's nothing to tell an owner that a third of his revenue is 13 points too much. Once the total had something to be measured against, 13 points of it were identified and taken out.
The collections side was the faster half. Money already earned on work already performed doesn't need a system to be finished before it can be asked for, which is why the first 30 days produced more cash than the first 30 days of anything else we could have done.
WHAT CHANGED, WEEK BY WEEK.
THE NUMBERS, NOT THE FEELING.
Overhead came down from 30 percent of revenue to 17 percent, and the collections process put $309,000 in the bank inside 30 days. The $348,000 line of credit was fully paid off within 60 days out of money the business had already earned. The owner then paid out $65,000 in bonuses, which is the figure worth reading twice: a one month cash event doesn't fund bonuses, and a corrected overhead rate does.
Total time from first call to the $348,000 line of credit reading zero: 60 days. The first $309,000 was in the bank inside the first 30, because collecting money already owed doesn't wait for a system to be finished.
DOES THIS SOUND FAMILIAR?
These two signals travel together. A line of credit that never comes down is funding operations rather than an asset, and an overhead rate nobody has compared to anything is usually the reason it never comes down. Owners in this position often describe it as a sales problem, and more revenue at 30 percent overhead makes the borrowing bigger rather than smaller.
If you can't say what percentage of your revenue goes to overhead, or you can say it and have nothing to judge it against, that number is where the money is going. Correcting it's faster than selling more work and it doesn't require winning a single new bid, which is why it's the first thing we look at rather than the last.
Every figure on this page came off this client's own books rather than a survey or an estimate, and where a number couldn't be verified it was left out. No client is identified here. The general contractors, the markets, and the projects stay out too, because any two of those would identify a company in a regional trade.
See how CFOS applies to grading subcontractors specifically on theGrading Operating System page, or book a 20 minute call and bring your own numbers.
FREQUENTLY ASKED.
