Mastering the flow of cash is the cornerstone of construction success – it’s the key to bolstering your bottom line, fortifying your business, and achieving true peace of mind. Today’s guest is Scott Peper, CEO of Mobilization Funding, who possesses extensive experience in assisting construction companies with their cash requirements. He discusses the essence of cash flow, its paramount importance, and the essential steps to enhance it within your organization. Drawing from his experience and expertise, he discusses several key areas that directly influence cash flow, profitability, and overall operational harmony. Scott also mentions his book, The Big Book of Cash Flow, and shares some exclusive sneak peeks such as the tools needed to control your cash flow. Join us on this transformative journey towards financial stability, increased profits, and an optimized business structure.
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Construction Cash Flow: How To Boost Your Bottom Line And Build A Better Business With Scott Peper
Cashflow. What is it? Why is it important and how to improve it in your business? That is the topic of conversation with my guest, Scott Peper. Scott is the Cofounder of Mobilization Funding. He works with construction companies extensively, helping them with their cash needs. We have a tremendous conversation on the importance of cashflow in your business.
The good news is to do to run profitable projects if you have the right information, and that’s why understanding your cashflow in your company is so critical. We are going to talk about things like getting your internal team aligned, negotiating terms, getting paid on time, building an emergency fund, building efficiencies into your schedule, and tightening overhead. All of these things have an impact on your cashflow, profit, and peace of mind. If those things are important to you, you are in the right place for this episode. Enjoy my conversation with Scott and please share it with anyone else that you think would benefit from reading.
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Scott, welcome to the show.
How are you doing? Thank you. I appreciate it. I’m glad to be on.
It’s a pleasure to have you on and I’m having you on for a very specific reason. You have a book called The Big Book of Cash Flow. We are going to dive right in here. What is cashflow?
I focus a lot on construction, so any examples that I speak about that I’m going to cater to the construction industry. It was intriguing to me because as I got into this business and I started working more and more with construction contractors, I realized that cashflow and profits sometimes are intermingled way more than they ever could be or should be.
Cashflow in the most simplistic terms, I like to explain it like this, you have cash needs. We will call those uses on a weekly basis. You have to spend cash for something, material, labor, payroll, equipment, and whatever it is. You need to be able to go to this pile of cash, pull some of it off there, and use it. Then you also have sources of cash that are coming into your business.
Oftentimes, folks will get confused between your sources of cash being your profit only, your source of cash being the revenue you take in from your customers, and your cashflow or the cash that you make is cashflow is profit and they are two distinctly different things. Cashflow is the amount of money you need to spend on a weekly basis measured against the amount of money you have coming in on a weekly basis.
You need to look at what sources of cash you have that can flow into your business that are outside of your company. For example, we all have heard many stories about Tesla. Tesla was unprofitable for however many years, yet they were cashflow positive. Why is that? There’s a distinct difference between profit and cashflow. If you are unprofitable, yet can cashflow, then obviously profit and cashflow are two different things.
I do want to explore that a little bit more. Please go into a little more detail on the differences between cashflow and profit.
Let’s look at it from a construction perspective. If you are a construction contractor, I like to work with examples in round numbers. Let’s take any trade. You have a $1 million contract. You have $800,000 of cost and you have built in there a 20% profit or $200,000 profit. Profit is the amount of money that you have left over after you have been paid $1 million and you have spent all of your expenses. That is your profit. Hands down. If in the construction world, you could get your contract, bid your work, do all the work tomorrow, and get paid on the third day. The profit on your bid sheet and the actual profit you earned on day three would probably look pretty similar. The problem is it doesn’t work that way as we all know.
Profit has to be measured over that same period of time in the life cycle of each job in order for you to determine whether your job was profitable. We all talk about job costing. We could do a whole episode on job costing and planning. At the end of the day, if you are measuring all of your jobs and what costs and expenses you have against each job, you can take in the revenue from that customer. It’s very easy to measure, what you got paid and what you didn’t and your pay application schedule. At the end of the entire experience, you got your last check. Even if it’s the retainage check or not, you got your last check, you could say, “I collected an entire million and I spent X on that job. All the way long.” That would be your profitability.
What is distinctly different about construction is that you have job costs, costs you put into that job. The easy ones are your suppliers and material, the direct labor that’s on there, or your subcontract labor. In any business, there’s overhead. Overhead are fixed costs and expenses that are on that business regardless of how much work you do that you can’t necessarily layer onto a job, things like your insurance.
To get your true profitability, you have to allocate some type of overhead to that project along the way. That’s your profit, but cashflow is, “I got that same $1 million job and I have $800,000 of cost. How much of that $800,000 do I need to spend at what period of time on what expenses in relation to when money is coming off the job? Do I need to spend all $800,000 before I even collect $1?”
In that particular example, you need to have an $800,000 pile of cash or source of cashflow from somewhere other than that job in order to be able to execute that $1 million job and ultimately make that $200,000 profit. If you were paid every seven days on that job instead, then maybe you only need $150,000 of cashflow to execute that job because you are going to be paid part of that $1 million every single week, and therefore the job cashflows itself much quicker.
That leads us to the obvious thing. How do I do that? How do I figure that out? One of the things that we determined is critical for construction contractors is to create a project cash flow. It’s different from taking your bid sheet and creating an awesome Gantt chart with your schedule. You want to layer in how much of that cost you have to spend each week and then measure that against when you expect and anticipate the pay applications you are invoicing on a monthly basis or weekly or whenever you are paid. Let’s say it’s monthly like a typical commercial construction project, and then layer in that revenue and see where your cashflow gaps are. That’s what’s critical, and then you can start to determine what your cash flow will be, not your profit.
When you say you should put together a project cashflow picture, are you saying on a per-project basis or on a typical project basis? What’s your perspective there?
It’s an absolute must to do it on a per-project basis. I will tell you if I didn’t believe that in the early parts of my career, I know it to be true now. The reason that is in our world we do construction lending for commercial subcontractors. As we were trying to figure out how much money to lend, do we approve a loan for a project? We also wanted to make sure we are giving the contractor enough money.
They might come in only asking for and we did this a couple of times, it was a big mistake. They might only come in and ask for $200,000 in that same, let’s keep going back to that $1 million job with $800,000 of cost for easy math. They might have come in and asked for $200,000 and we’d say, “That works for us. No problem.”
If we gave them that $200,000 when they needed it, but the fact is they need $450,000. We are doing them no justice by giving them half of the amount they need. It’s not that they don’t know they had to spend it. They didn’t know how much they needed before they had money coming in. We started to build this project cashflow for ourselves as a lender to determine how much someone needs, when they need it, and then also be able to create this structure to repay it. What we quickly realized and this was the best part, when we gave the construction contractors this cashflow tool in advance, essentially, we take their bid sheet layer in how much their payroll is on a weekly basis. What are your terms with your supplier? When do you plan on ordering?
Every contractor has a pretty decent way of bidding. Some have it very intricate and efficient. They all have a good way to know what their costs are, at least the plan what their costs are. Most also have a very good idea of what their work schedule is going to be. They have planned it out. They know it’s a 6, 10, or 12-week or 24 months. Whatever it is. What a lot of people miss is the third and most critical part. Over that schedule, how much money do I need to spend off of the expenses that I have budgeted from my bid sheet? That is what matters. That’s the project cashflow.
That’s what tells you, “I need $400,000 of this $800,000 of cost. I only need $200,000. I have supplier terms of 45 days.” What happened is we would turn this cashflow around. We’d build it and we’d send it back to the client. Almost always it would be they came in asking for more money than they needed. We’d go back and say, “You need $225,000. You only need $20,000 a week for your payroll.”
“You need a tranche of $20,000 per week for payroll and then you need a tranche at week four for $100,000 for the material that you ordered on day one, but you have a 30-day supply terms. You need another $50,000 four weeks later for your other balance of material. You start cashflowing there because you are receiving monies,” and they are like, “Really? Great.”
The other side of the coin is they come in and ask you for $200,000. We show them, “You have to invest $450,000 into this project.” Here’s the problem. You are ordering your material on the first week of the month, which is obvious. You have some material shortages you need to get ahead of it. That means that you only have a 30-day term. You are going to have to pay for that material on week one of the next months, but you only invoiced one week prior. You have to float that material bill for 3 or 4 weeks. They are like, “That’s tough. I made $450,000.” I’m like, “The project doesn’t work. It eats up too much cash that you don’t have or do you want to borrow from us?
“What can we do?” I said, “If you could go to one of your suppliers and get 60-day terms or 45-day terms. Where you run into it, “Mr. Site Contractors, your equipment rental is so expensive here. It’s fine if you can pay it when you are paid. You have plenty of margin in the job, but if you have to borrow money to pay for your equipment rental, it totally hoses you.”
The best part that worked out from there, now you have this contractor who has a bid sheet. They know exactly what their schedule is and now they know what the job looks like from a cash perspective week by week. It’s so empowering. This was the part that impressed me the most. They would take that information before the job ever started and fix almost all the problems. They are like, “Scott, I got it. I’m going to go shopping for my equipment rental. I was only going to Ring Power because right now Ring is the one that’s given me the best opportunity for that. I’m jammed up with Caterpillar or whatever.”
Let me put a little point here. When we are thinking about cashflow in our business, we are not just thinking about the amount of money that’s coming in, but the timing of that money. Understanding the timing of the money then leads me to be able to make strategic decisions whether it’s in terms of tapping a line of credit, getting a loan, or negotiating terms. If I understand it per project, then I can be much more proactive in the way that I manage my projects and manage my cash around those projects.
This particular contract, in that case, is empowered with the information now, and this was the coolest part. A lot of leaders and businesses don’t know what to do. The crazy part about the construction contractor that I have seen is they know exactly what to do, what buttons to push, and where to go fix the problems. They didn’t know what the problem was beforehand.
Now that they had this information beforehand, they are like, “That’s $700,000 that I have to spend for equipment. I’m going to go shopping for it now. Give me a couple of days.” They went to the contractor with this sheet and said, “I’m about to spend $700,000 on equipment on this project. It’s a big line for me. Do you want me to rent it from you?” They go to their three suppliers.
At that point, every salesperson at equipment rental wants a $700,000 order in this example. They were way better terms to negotiate. Credit was interested in giving them 45-day terms, because I told them, “If you can get this in 45-day terms, you only need a $225,000 loan from us and you can cashflow this whole project and you are good. If you can pay for your equipment when you are paid, you are good.’
Now they take the cashflow, they go to the supplier, and they are able to detail that out for them. Now they have three suppliers competing. They were able to get another $100,000 taken off their equipment rental. Whereas if they started with the equipment rental and got 45, 60, or 75 days out and they are 30 days late now paying, they have no dues, they got no leverage, and they can’t negotiate.
They are looking like they are the person that’s a problem and they are the terrible contractor and they have no credit. They are not creditworthy. I’m going to yank your equipment off the site. All that crap doesn’t happen when you have good information upfront. As I said, the best part about the construction world is they know what to do.
What is vital here is the connection between the quality of the information that you have and then the leverage that you gain to drive profitability in your business. How much work are we talking about here for someone to get their arms around the cashflow of every single project?
You got to know your numbers, but a lot of these folks know it right off their bid sheet. We made that very easy. That cashflow tool I’m talking about, we built it on our website. Anybody can go there and use it. It’s 100% free. If you are super savvy in Excel, you can download the Excel file. There’s an instructional guide on how to fill it out. It costs you nothing.
We do get your email so we can email you that but we don’t market to it. What we did learn is a lot of folks aren’t Excel savvy, myself included. I’m much more Excel savvy now, but I wasn’t always. Instead, we built it on our website where you can also toggle through and answer questions as if you were taking them directly off of your bid sheet, and then implement your terms. We build the spreadsheet for you automatically and then email you the spreadsheet with the tutorial and the information for your exact job. It’s very easy at that point.
Let’s take a little dive in because you have already been touching on this. As you work with contractors, what is the relationship between the contractors who have their arms around this cashflow issue and the alignment of the internal team? What is that relationship?
That part is critical because a lot of companies in the construction world have a struggle between what’s going on at the project site and the leadership of the site pushing and trying to drive it. Plus, they are measured. They are always balancing their own trades, other trades, and their customer. Internally, in order for that project manager to manage and execute the work they need to do, they have things they need from the office.
A lot of companies in the construction world have a struggle between what's going on the project site and the leadership of the site pushing and trying to drive it. Click To TweetThey have to buy materials. They need to make sure their labor is happy. When you have this cashflow upfront and you understand exactly what it takes, you can start to align your internal teams, in particular, your project management team and your accounting team to have a weekly meeting to say, “This is where the project is going. We are ahead of schedule. I’m going to invoice $100,000 more this month than I anticipated. The schedule’s running behind. I’m not going to invoice $100,000 more.”
They can start to communicate what gets ordered and when it gets ordered, and make those adjustments on a weekly basis in a quick routine meeting off of a cashflow sheet that everybody understood and bought into in the beginning. They can lean on their accounting team to make those adjustments on a weekly basis and monthly basis off on what gets invoiced, what’s been spent, and the schedule. Critical communication solves a ton of problems for everybody.
It’s interesting because on a project kickoff, people will take a look at the schedule and they will talk about any of the roadblocks in the schedule. I would imagine that not necessarily are they talking about the roadblocks in the cashflow around the building of the project. They are not doing that on a disciplined regular basis. It sounds like using a tool like yours or having an approach like the one that you are talking about, you are not only bringing the building of the project, but you are bringing the cashflow associated with the project to the table at the very beginning.
You can run those scenarios easily too. What happens if we need to accelerate this schedule? What does that mean? That means we are going to have 4 crews instead of 2 crews. Let’s double the payroll. What does that mean? How much more do you invoice that month? That’s great. That shows you do need more cash but you need more cash but you are cashflow positive two weeks sooner because you are able to bill more that first month and the second month than you anticipated.
What happens if there’s a bad storm? We are here in Florida. We do loans all over the country, but there are storms and weather issues. What happens if it rains for two weeks straight on a site and your sites are shut down? This happened in California. Not everybody bills. What if the architect screwed up the design and there’s a design hold on the whole project?
The other side of it too, depending on what trade you are in, if you are pouring concrete and it’s just the foundational pad, you are out on the site, you can manage that. If you are working on a four-story building that’s structural steel and there’s something wrong with the structural steel, you are not going to be on the second floor or on the third floor when you thought you were. There might be some steel engineering.
All these are normal things that happen on a construction site. It doesn’t mean any of it’s bad. It doesn’t necessarily mean any of it’s good. It might mean for you. “I wish I didn’t order my material last time if I knew there was going to be a four-week hold. I would have ordered it later,” because you have to pay for that. Those are the kinds of decisions that you can make.
I wish I knew that. I would have only put a couple of people on there. I’d have moved my crew and my labor force to the other side. I’d rather go get ahead on this other project that I can invoice quicker because I can’t afford to keep the labor on this job because if I don’t invoice enough there, I’m going to get burned. I’m going to reduce my profitability by 2% points if I keep working on that job until they can get it going. These are the kinds of decisions you are making easily because it’s right in front of you.
This is essential as well because what we are talking about is decisions that perhaps, at the moment, seem not massively significant, but they are adding up over time. If I have a clear picture of my cashflow, then I can be making those tactical decisions on every project. The points and percentages add up over time and increase the profitability of the organization.
If you are on a job that takes six months to do or longer, and you don’t know what the profitability is until you finish a job that 6 or 12 months, it’s hard to try to forecast the overall profitability of your business if you are making money or not. Often, I hear contractors say, “I’m not going to quite know what I’m making on that job until I get to the end.” That stinks for them. It’s tough. It’s hard to do that because how do you know?
If you are on a job that takes six months to do or longer, it's hard to try to forecast the overall profitability of your business if you are making money or not. Click To TweetWe have been talking a lot about spending money. One of the things that drives me crazy when I’m talking to my clients is the whole idea of chasing money. If you have done the work, you deserve to get paid. Be aggressive in getting paid on time. How do you work with your clients advising them to set themselves up for success when it comes to getting paid on time?
The first step is you got to know what you signed up for. If you signed up for paid if paid and then you want to be paid every two weeks, you set yourself up in a bad spot. That’s first and foremost. Know what you signed up for.
You are speaking specifically from a specialty trade perspective there.
Specialty trade perspective and could be a general contractor too, even if that’s self-performing some work. You want to know what you signed up for and most do. What I mean by that is even if you know what you signed up for, don’t think and or assume, “I signed up for this but I will get them to pay me sooner.” That’s not a good strategy because if they don’t it’s, it’s tough. God forbid, there’s ever any problem. Whatever is in writing is what’s going to be followed for sure. That’s the first thing.
The second thing is it’s so critical to know what your costs and expenses are because you want to do the work that you know you can do in a productive and most efficient possible manner, but it’s also profitable. There’s no reason to do work that you are not going to make money on. Even if you can do the work and even if it’s for this next great customer but your business isn’t ready for that job or that customer yet to the point where you have to take the job and be unprofitable. It’s not worth putting that risk on your business all the time.
There's no reason to do work that you are not going to make money on. Click To TweetI’m not here to tell you not to do a job at a little thinner margin to get in with a certain GC. What I’m trying to articulate to you, it’s not worth it if that thin margin turns unprofitable and there’s a fine line with that. You want to know where that fine line is and be eyes wide open. This answers your question may be a little more directly now.
Once you do invoice your customer, first and foremost, invoice them accurately for what you did. Know what that schedule of values is. If you signed up for a certain percentage complete, in your schedule of values, you want to do your best job upfront to define what is the difference between 20% complete, 22% complete, and 25% complete. It may get definitive, less subjective, and more objective.
For example, I plugged my computer into the wall. It’s either plugged in or it’s not. As many of those black-and-white done or not done things you can do in your schedule of values will be very helpful for you. You are not on a site doing this field audit walking it or more importantly the bank inspector who doesn’t care or doesn’t know what to look at. They don’t know the difference between 25% and 20%. You know what they are going to do, they are going to pick 20% because they are trying to be risk but they know what’s plugged in and they know what’s not plugged for example.
What I’m hearing here is as a contractor, regardless of where I’m sitting in the project, what type of work I do, and whether I’m a GC or a specialty contractor, I have to be very aggressive in taking control of what I have control over and not allowing other people to suck that control away because of my lack of discipline.
It’s not even as much discipline. You are going to get me going on another one of my favorite topics right now, but it’s the difference between having an abundance mentality and a scarcity mentality. If you are walking into every meeting like, “I hope they like me. I’m not confident in what work I can do. I need to impress this GC.” You give off the impression that you are a little nervous or scared.
Even though you have the best intentions at heart and you desire to do good and you can, they are reading that you are uncomfortable and that uncomfortableness is going to make them uncomfortable. You want to walk in a room, particularly on a construction site with all those trades. Regardless of what specialty you are in, GC or not, you want to be like, “I’m the baddest MFR in town at whatever I do. The reason I’m here is that I perform, my crew performs, we do it safely, we do it effectively, we do it right, and we do it perfectly the way we can. Do we make mistakes? Absolutely. When we do, we own and fix them. To do that and deliver that, this is what I need.”
When you have that mentality, someone that’s sitting on top of that job has to manage twenty different trades or they are worried about making their customer happy. They are going to be like, “That’s the dude I want to work with. He might be tough to work with but he wasn’t unreasonable, but I don’t have to worry about him.” What everybody cares about on a construction site, most important is performance. Everybody talks about price but they care about performance the most.
Everybody talks about price, but what everybody cares about on a construction site is performance. Click To TweetLet me go into that abundance mentality versus a scarcity mentality. I’d like you to address that framework because it’s something that some people may be familiar with regards to how I take it as an abundance mentality and yet manage risk on a project. One of the things that I see in construction is that if you are over-optimistic, it can come back and bite you. How do you balance that abundance mentality with the management of risk?
Abundance and a super positive attitude and seeing the shiny side of everything is not an abundance mentality only on a construction site. Abundance mentality is positivity and yes I can, but it’s more of, “Yes, I can if you do this, or yes, I can if we are in this scenario.” “Can you get this done in five weeks?” “Yes, I can. In order to do that, I’m going to have to double my labor. I’m going to need you to pay me every seven days and I’m going to need this and this.” “I can’t do that.” “There’s no way for me to be able to do that for you then if not.” That’s an example.
What I meant by the other side of the abundance piece is it’s being confident in what you know you can do and also being honest about that. If you are used to doing $500,000 jobs and your customer wants you to do a $750,000 job or maybe a $1 million job, can you do it? Sure, you can. If they want to give you a $2.5 million job and you have never done one of those before and you are doing a job that’s five times the size. It’s five times the amount of work, not necessarily an extra $2 million of material that you are selling them. You have to execute it. You got to be honest with yourself. You need to walk into that $2.5 million job with probably 30% or 40% more margin if you are going to do it than you might otherwise on the other.
Someone would say to me now, “The bigger the job, the smaller the margin.” Not for you. You haven’t done a big job before. You are going to make mistakes. There are going to be things you don’t know. Your risk needs to be, “I can go into that job but I have to manage my risk. I have to have way more profit in there for the things I might screw up or I don’t know yet.”
That is one of the biggest critical things I see in the construction contracting world. They get very enamored by the price of the top-line value of the contract, hammer into it, and even say, “The bigger jobs you got to do at a thinner margin.” When I hear that from someone, it may be true, but then I say to them, “How many of these jobs have you done before? Do you know you can do a job like that at that margin because it’s different?”
One of the biggest critical things in the construction contracting world is they get very enamored by the price of the top-line value of the contract. Click To TweetI want to circle around this a little bit and I’d like to make this emphasis because when you are speaking like this, it reminds me of the phrase that I emphasize and that is, “Kings talk to kings.” If you go into a negotiation, if you go into e exploring a contract, and doing work with someone, regardless of where you sit in the chain of construction, you have to go in with that power that, “I’m a king and it’s a privilege to do business with me.”
If you are going to do that and it’s not going to be BS, then 1) You have to have your funnel full of projects that you can build so that you have the power to walk away, and 2) You have to be able to execute. You have got to be able to develop business and execute that business well in order to have the power to go into those negotiations like you are saying and have the leverage that we began to talk about at the beginning to negotiate the terms that you want and to be able to establish those relationships that are profitable for you.
Don’t rush your growth. I say this. It’s easy for me to say now. I’m many years into this business and I spent several years in some overlap in medical device sales. I can tell you this because I have made this mistake 100 times. We tried to grow Mobilization Funding too fast in the early years and we ran into all kinds of problems.
Not necessarily problems, but we tried to fund too many loans. We tried to fund projects we didn’t know enough about. We tried to fund specialties we didn’t know enough about. All the stuff that quite candidly is exactly what a construction leader would do in a business because we are very much on the site. We are alongside our customers. If they win, we win. If they lose, we typically lose. That’s how it goes. I’m not saying this from some Ivory Tower. I’m saying this from pure pain. I learned the hard way.
There are two other things that I want to talk about in terms of cashflow management and that is building an emergency fund and then tightening overhead. We are in 2023 when we are doing this. I know we have been trying to talk ourselves into our recession for the last couple of years. It’s not quite here yet, it may come soon, but we haven’t had a strong downturn since ’08. What happens is that we are human beings and so we forget that a decade ago or so, things were terrible and it was tough. Building an emergency fund, how do you counsel construction companies to be disciplined as far as that’s concerned?
Construction is one of the hardest cashflow cycles in industries on the earth. As much as it takes for every book you read on every other business to build up your retainer earnings, create your balance sheet, store your profits, and be careful with your CapEx spending. When you do make money, keep it in the business. Don’t take those distributions right away.
All those things that you hear and read in books are true for construction. One thing I want to say about construction, to give everybody a little bit of grace, is it’s even more so important for construction because the cashflow cycle that we live in construction is so vastly different than any other business. It takes longer for you to accumulate profit. You have more risks than average businesses. The numbers are bigger. A mistake can cost you way more than others.
If you try to think about things in five-year horizon increments, if you want to be profitable and have something in five years, then think about not taking a nickel for five years even if you can. If you at least have that mentality, you will be there probably a little quicker hopefully, but you may not. You will be more conditioned yourself because you working your ass off too.
You are working so hard, you are working these long hours, and you have all this risk. I’m sure you have walked into companies and we hear this all the time. When I was a $2 million company, I’m now a $10 million company and I’m still working for the same paycheck. It’s not because they have this stored profit, it’s because grew too fast or did all these mistakes. We built a profit and got wiped out and so you are working for the same paycheck.
Work for the same paycheck but do profitable jobs and store your profit, and I promise you in that 5 or 10-year increment, you might still be working for the same paycheck, but it will be your choice. You will have plenty of cash in your business and you will sleep better at night because you have retained your profits.
The one thing that you have mentioned is this idea of the shiny dollars of the top-line project number. I landed a $1 million, $10 million, or $50 million project. Oftentimes in construction, ego is attached to that number and it’s understandable. It’s interesting how contractors need to learn how to shift their ego needs from the top line to the bottom line and to find that ego satisfaction in the actual execution of the project that leads to that bottom line.
I always sum it up like this to folks. “While you are focused on the top line, I want to ask you a question.” “What is it, Scott?” “If you were to sell the business, would that be something that interests you?” “Yes.” “At the end of the year, if you wanted to give Christmas bonuses to everybody and take a huge distribution, would that be something that interests you?” “Yes.”
“What if I told you that you’d have more Christmas bonuses, more material things, more money you could take with a $5 million business perfectly executed, or you could have a $20 million business and not have any of those things? Which one would you rather have?” They all say, “I’d rather have the $5 million business.” I say, “Perfect. Let’s build a great $5 million business right now that’s profitable,” or whatever their case. Maybe it’s $20 million instead of $40 million.
Nail it perfectly with the size that you are at now. Build those systems and processes that showed you and allowed you to nail it and then you can start to try to scale it by taking on the next bigger job or multiple jobs or whatnot. If you fly out and grow top-line in this cashflow cycle, even more so than any. It works for any business, even especially in the construction cashflow cycle.
You don’t have the right stuff. You don’t know what you are doing. You don’t where you are at any given time. You can get completely smoked or you end up working for somebody else. You work for your lender or you work for the SBA loan or you work for this piece of property and then you have to refinance it fifteen times to get even. It’s not fun. You didn’t get into the business to do that.
Let me ask you this then. Let’s say I do want to expand the business and I’m sure you talk to contractors all the time about this and you painted that picture earlier about doing $1 million projects and now my client’s coming to me with a $2 million project, but I have never done the $2 million project before. What advice do you give to contractors in terms of the projects to pick for that top line that is associated with that top-line revenue growth and when there’s that gap that they haven’t yet bridged?
I like to look at it like this. The top line is important to look at. How many extra crews am I going to have to manage to do that $2 million? Get into a frame of mind of what you know that you can do. Managing two crews is easy. That’s great. Move from 1 crew to 2 crews then, or move from 2 to 3. How much work can you do with three crews? I can do that $2 million job. Can you do any other jobs with it? Start to distill it down into what labor you can get. What labor can you manage? That’s a great way to go. Without that and you are without a team, you can’t scale.
Can I make a quick point there? This is essential because you might be looking at a project and think, “Technically speaking, I understand that project and I know how to build that type of project. It’s bigger than the ones I have done before.” If I miss that labor component that you brought up, if I don’t have access to two crews, or if I do need 2 instead of 1 in my second crew as a B crew or a C crew, then that has a tremendous impact on the business regardless of whether or not I know how to build that project.
What if you say, “I’m going to sub-labor that.” “Have you ever gotten subcontract labor before?” “No. I have done everything with direct crews.” “How do you know how much the subcontract labor is going to cost?”
I’d like to go to overhead. What are the sneaky mistakes, those hidden mistakes when it comes to overhead that contractors miss that when you show them those things, they are like, “I have been spending bucks on this for years, and if I knew that, it would have had a tremendous difference?”
The majority of folks know the overhead items. They know that if they are paying for health insurance, it’s an overhead item. They know if they are paying for rent, it’s an overhead item. Any debt service you have is an overhead item. Including the debt service on the equipment you own. You might be able to layer your equipment into a job and say, “That’s a job cost.” It is while it’s working, but what if it’s not? When it’s not, it’s still overhead.
You got to know what some of these costs are and monitor that. Let’s give everybody the benefit of that and say they know what those costs are. The ones that people miss the most often in terms of overhead that I see is debt service. Whatever debts you have, are you managing those properly to know that they are part of your fixed expense now? If you get an SBA loan or you have another type of term loan, it becomes a fixed expense. It’s hard to layer that in as a job cost. You can put it on your bid sheet, but it’s not a true job cost. You have to account for it.
Where I see the problems and the eye-opening moments is you don’t know how much of those fixed expenses you have on a monthly basis and how that’s going to relate to your revenue, and I will give you an example. Let’s take the 10 and 10 Method. A lot of people say, “I got 10% baked in here for overhead and I got 10% for profit.” Fine. Let’s say you have 10% overhead and we will use easy math. Again, it’s a $10 million business and you have $1 million of overhead. That’s $88,000-ish a month. Before you do anything, any given month, the first $88,000 of top-line revenue that comes in is going to have to go to spend towards overhead.
Let’s take this $2 million job that you are doing and let’s say you bid it at a 17% margin. No problem. You are set up to make $340,000 a profit. Good job. Perfect. The old retainage comes in. That’s 10%. $200,000 is coming off that job right out of the gate. You got to assume you are not going to get it until the end and you can’t account for it. Now you only have $140,000 of essentially positive cashflow in that job.
From the beginning of our interview here, we talked about cashflow. You have no clue when that $140,000 is going to come. It’s not like it’s a seven-month job and they are going to send you $20,000 every month. There’s no such thing on a schedule of values that says, “My profit is $20,000 and I’m going to earn it in even increments.”
It might be in your overhead, labor, or contingencies. We all know where profits at. Here’s what happens. If your overhead is 10% and you have a 17% margin project, and they keep 10% for retainage, you now are only operating with 7% free cashflow. This means if you layer in the 10% overhead into this job, you have zero positive cashflow on this project.
Furthermore, in order to even accomplish this job at any point, you have to invest 3% into that job to be positive cashflow. Not profitable, but you have to spend. In this case, 3% of a $2 million job is $30,000 or $60,0000. You are going to have to spend $60,000 on that job in order to finish it. You can’t use every dollar that comes off of it for any overhead expenses.
It’s the life that folks live, but you got to know that. That’s what you are doing. That’s why the overhead allocation is such an important piece to it because you want to know what your overhead is so that you can properly understand how you are going to account for that, pay for that, budget that, and how much work you have to do.
The beauty of overhead and why we call it an overhead allocation is, as you scale and get bigger, your overhead doesn’t necessarily have to grow. What happens early on in your business, you need to have the footprint of your business. Your overhead is going to be a much higher percentage of your business as it’s smaller than as you grow it because you might have ten people that you need. There are ten functions, but those ten people at scale might be able to do three times the amount of work that you are doing right now.
At three times the amount of work, they are not 10%. It’s only 4% or 6% maybe, whatever the number might be. Those are the things that you have to account for. When I show that to a contractor, when they have that information up front, they are like, “I can’t do that. I’m not going to spend $60,000 on that,” so they might not do the project.
They might go tell their estimator, “We need to bid projects that are going to be this and this instead,” or they go negotiate with the things they can do. They pull the levers they can pull with their suppliers or with their subcontract labor, or they do get financing on a job. They say to themselves, “Now I know I can get this financing and where I’m going to get it from.”
We could sit here and talk all day about this stuff and we are not going to do that because I’m not Joe Rogan. What I’d like you to do is to summarize 2 or 3 immediate action items that a contractor can take to improve his or her cashflow in the next 30 to 90 days.
The first thing is to go away for a weekend. Sit down by yourself and assess what you want, what’s important to you, and what’s not. I say that because you need to get into the right framework. Are you okay with having a $3 million business that’s very profitable? That might be $1 million worth of residential service work and $2 million worth of commercial work. Do you want to be a $50 million business doing big projects that are no less than $5 million in size?
Whatever it is that you want to be, figure that out. Are you willing to live with whatever those consequences are? Those consequences are the timeframe it might take to get to $50 million or the profitability. At the end of a ten-year period, you might be wildly successful with a ton of profit and everything you’d wanted, but did you have to live for eight years with no money at all, and then you made all of your money the last two because you needed to invest back in the business in order to get there?
When I say what do you want to be, that’s what you got to figure out first. That’s number one. Once you know that, then and only then can you decide what you are willing to sacrifice under what conditions you are willing to live for what period of time for you to get there. If you don’t do that, you are going to go out there and fly by the seat of your pants without a plan, and you don’t know what you are going to be comfortable living with or not. That’s first.
Once you determine that, and if you have a business right now, there’s going to be a transition period. The next thing you need to do is go sit down and build out what your actual overhead expenses are. Understand exactly what you have to spend on a monthly basis. Do a deep dive into who’s important and who’s not.
I don’t mean people, but maybe what’s important or what’s not. Who’s pulling their way? What roles do you need? Do you need all your family members in there? If you do, great, but are they all filling a role? That’s any business. Are they playing a role? Can you have a tough conversation with them? They are there and they are not doing their job. Are you willing to fire them? These are parts of that. Go sit by yourself for a weekend.
Once you do that, you need to get financial expertise in your business, and there are a couple of different ways you can do that. You can hire for it and it’s not just go hire an accountant. It’s way different. When I say financial expertise, I’m not talking about doing your taxes. I’m talking about having real finance knowledge in your business that can look at your business, understand how you get revenue, how you want to recognize your revenue, and under what manner you are going to build your structures.
You might hear the GL codes. How you are going to build your general ledger? Which expense items are you going to take and when? What financing options do you have? How are you going to cashflow this business to the plan that you want to execute? You can layer over what period of time. There are some great interim CFOs out there that understand construction.
There are some accounting firms out there that can do more than taxes and they can help you. At the end of the day, you are going to need a good finance brain to build the structure for you based on where you want to go. You can then hire that controller or that bookkeeper that can follow the plan that was executed by the right finance mine on a daily and weekly basis, and then be monitored on a monthly basis with your financials from your financial expert.
Those are the two things. If you do those right out of the gate, you are now empowered and with an understanding of information that will allow you to go out and execute whatever it is that you want to do. You will know. Do I need to bid 25 jobs a month to get the revenue I want at the profitability I want, or do I need to bid 50? What is it?
Be clear on your motivations. Take the time to figure out the nuts and bolts of your business from an overhead perspective and then get the right expertise as far as the finances are concerned so that you can get the information that you need on a consistent basis to make good decisions.
It’s way too often. I’m seeing businesses or owners running very complex businesses, which any construction business is. These are not simple P&Ls. These are not simple structures. You are running a very complex financial-structured business. There are a lot of items. You make money in a lot of different ways. You have inventory, you have costs, you have project costs, and you have supplier credit.
It’s a very dynamic construction business from a financial expertise perspective. To run that business without monthly financials is almost suicide. It will bring you down. Investing in that early is important. It’s not doing your taxes. This is real finance. It’s your report card. It’s the access to the information you have so you can be empowered to make these decisions.
I can tell you right now, you will know what decisions to make because I have met every single contractor from decades of experience to multiple years. In their businesses or communities, when I give them the information they need on a project, they know exactly how to fix it. They know what levers to push and they know how to fix it. It’s amazing.
That is not the case for a lot of owners in other businesses in other industries. You can give them all the information and they don’t know what to do. I have not yet met a construction contractor that doesn’t know what to do. Everyone struggles with doing it but they know what to do. They know they have to go talk to their GC or supplier and get better terms.
Their willingness to do it or execute it is a different story, but they know what to do. I see construction contractors very motivated to do what they need to do when they see the information up front and they know that it’s the difference between putting money in their pocket, paying their employees, or spending Monday through Thursday chasing money down every week instead of working on top of their business and working on strategy.
Tell us a little bit more about your business, the work that you do, and how people can get in touch with you.
I’m the CEO and Cofounder of Mobilization Funding. We are a finance company that’s specific to construction contractors, manufacturers, and fabricators. We started in construction so we know it well. Essentially, we are a source of capital for you to use to execute a project. We have talked all about cashflow and everyone reading this in the construction world knows the struggles. You start a job, you have to pay for things all the way along starting early, and it takes sometimes 30, 60, or even 90 days before you get your first checks off the job. You at least work 30, put an invoice in, and probably work another 30 before you get paid.
We are a source of cash to help you bridge the gap in that from getting from the start of the job to the point of the job where it’s cashflow-positive. Our loans are short-term in nature because they are always project specific. They allow you to use the dollars upfront when you need it, and then as you are paid on the project, we get paid back.
We are not a factoring company. We are not trying to offload our credit on your customer. We are basically assessing your ability to perform the work that you have been contracted to do. If we can help supply the cash that you need, you can execute it more efficiently. Put your invoices into your customer. They will pay you because you have executed and when they pay you, we can then start to reimburse back the expenses that we have helped pay you for, and get you to a point of cashflow-positive. They can usually do that somewhere between a cost of 1% to 3% of their margin.
How can people get in touch with you?
Our website, MobilizationFunding.com. I’m very active on LinkedIn. You can find me at Scott Peper on LinkedIn. We have a great YouTube channel as well. You go type in Mobilization Funding. Our channel will come right up. We have tons of content and great other information on there. A lot of stuff that we have kicked around in some of these topics and many more. My personal LinkedIn, our YouTube channel, and our website are the best places to find us.
You do have the book there, The Big Book of Cash Flow.
Yes. You can get that book on Amazon. They have been carrying it pretty well. You can also get it from our website. There’s a link directly to the publisher. If Amazon happens to be out, you can go right to our website. All of the resources and the tools and the cashflow tools I have talked about are on that resource page as well. You can get a link to purchase the book directly from the publisher, but it’s on Amazon.
For everyone, MobilizationFunding.com/cashflow and that’s where you can download the Cashflow Calculator that we spoke about earlier. Is that correct, Scott?
That’s correct.
I appreciate you joining me. Tell me again, you are in Florida there?
We are in Tampa, Florida. We work all across the country. I have clients everywhere.
In Tampa, Florida, if for some reason I’m ever in Tampa, what’s the one restaurant I got to hit in Tampa?
There are a lot of good ones now. The most famous that people talk about is probably Bern’s Steak House, which is a great steakhouse. One of the oldest in the country. They are the largest private wine holder in the world. It’s an amazing wine cellar. You’d be amazed. The wine cellar is a building that’s larger than the actual restaurant. The great hotel they own across the street is called the Epicurean Hotel, but there are many others too.
My audience is into steak and wine. If you are ever in Tampa and you need to combine those two, we have got the Bern’s Steak House recommendation. Scott, thank you for your generosity. Thank you for your insights and I do wish you all the best.
Thank you. I appreciate it. God bless.
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Thank you for reading my discussion with Scott. If you like the show, please give the show a rating and a review wherever you get your show, and we are going to catch you on the next episode. Thanks again for reading.
Important Links
- Mobilization Funding
- The Big Book of Cash Flow
- Construction Genius: Effective, Hands-On, Practical, Simple, No-BS Leadership, Strategy, Sales, and Marketing Advice for Construction Companies
- Amazon – Construction Genius
- Scott Peper – LinkedIn
- Mobilization Funding – YouTube
- MobilizationFunding.com/cashflow
- Bern’s Steak House
- https://www.Amazon.com/Big-Book-Cash-Flow-Performance/dp/1667870955
About Scott Peper
