Issue 5 of 9: Cash Generation

Construction Ownership Transition Issue 5 of 9: Does the Business Generate Enough Free Cash Flow to Make the Transition Equitable for All Parties?

D. Brown Management Profile Picture
Share
Succession: Ownership Transition Issues - Number 5 Cash Generation.
  • Building construction projects -- just by themselves -- is very cash intensive
  • For that reason, a contractor must have enough working capital along with financing provided by their operating Line-of-Credit (LOC). Depending on the type of contracting business (GC, Specialty, Civil) and work types, this might range between 5-15% of the revenue.  
  • Growth requires building additional working capital to run the business safely. Your financial partners will ensure that you work within those constraints.
  • Working capital is only built through earning profits and retaining them after taxes are paid.  

For a simple example: If a contractor requires 10% of their revenue in working capital and is projecting $50M in revenue the following year, they will will need $5M in working capital. 

If they earn a 5% pre-tax net profit and pay 40% in taxes, they will retain $1.5M in earnings.  

If they plan to grow by 15% the following year to $57M, they will need another $700K (10%) in working capital.  

That means they will have $800K in free cash flow to pay for the business or provide a return on capital invested by the new ownership group.


Issue 5 of 9: Cash Generation
Continue building value in your business, yourself and your key team members with a good succession strategy....

Issue 5 of 9: Cash Generation
Continue building value in your business, yourself and your key team members with a good succession strategy....

Racing, Equipment, Heart Rates, and Contractor Growth
The fastest marathon runner used shoes costing $300 and is 2X as fast as an intermediate runner. The fastest 100-mile bicycle time is about 2.5X faster than the fastest marathon runner, going nearly 4X as far. Contractor and career growth is similar.
If a Problem is Worth Solving, It's Worth Solving All the Way
Not all problems are created equal and not all problems are even worth solving. When they are; be aggressive in solving them so they never come up again. Remember that 90% of continuous improvement is just about eliminating problems consistently.
Shifting Locus of Control
Technical skills stand on a foundation of behaviors that ultimately determine how effectively those skills are applied. Accelerating behaviors include: