Cash Flow and the 5Cs of Credit - Capacity

The 5Cs of Credit consist of Character, Capital, Capacity, Collateral, and Conditions.

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The 3rd of the 5Cs of Credit is how much capacity your business has to profitably build the projects, ensuring payback of the loan or minimal risk in the case of insurance or bonding.  

Cash Flow: 5Cs of Credit. Capacity.

Capacity is calculated in several ways with different ratios or levels set, depending on the type of contractor, length of projects, and the character of the owners and the financial partner. Some of the more common measures are:

  • Debt Service Coverage Ratio, which Greg Martin describes well.
  • Liabilities / Equity typically 2:1 or better. Often, Tangible Net Worth (TNW) will be looked at instead of equity.  
  • Backlog / Working Capital. Varies widely depending on the length of the backlog and type of contractor. Typically, 10:1 for a specialty and 20:1 for a GC are safe ranges. Note that you should adjust the basic Working Capital calculation (current assets - current liabilities) for related party transactions, past due accounts, inventory, and retentions more than 180 days out, etc.  
  • Backlog / TNW
  • Backlog Margin / Average Monthly G&A Expenses. This essentially tells you how many months you can see your bills being paid in the future. This varies significantly per contractor, but anything less than 5 months starts to get a bit scary.  

You should develop internal ratios and policies that suit your business and align with your financial partners.


Cash Flow and the 5Cs of Credit - Capacity
Great cash flow is a key driver of valuation and successful successions. Running out of cash is is the #1 reason contractors fail. Improving cash flow improves your Return on Equity. Protect yourself and never let cash flow be the limitation to your profitable growth....

Cash Flow and the 5Cs of Credit - Capacity
Great cash flow is a key driver of valuation and successful successions. Running out of cash is is the #1 reason contractors fail. Improving cash flow improves your Return on Equity. Protect yourself and never let cash flow be the limitation to your profitable growth....

Field Productivity - The Improvement Pyramid
An improvement of a few minutes per day to actual installation time compounded monthly is worth about $800K per year for a $25M contractor. What is it worth to you? Improvements to field productivity can be viewed as 4 major stages of a pyramid.
A Broader Definition of a Change on a Construction Project
The first step for contractors improving their management of changes on a project is simply earlier identification. This starts with a better definition of what a change really is, and then setting standards within your company around that definition.
Clear Installation Information
For a contractor to maximize their labor productivity, they need to start with clear information provided to the crews doing the actual installation. Good information is the first of the six pillars of productivity and means several things: