A few weeks ago we talked about cash flow in your business. Specifically, reviewing your overhead expenses so you can know your cash flow needs month by month. Having too many employees for your volume of work will also hurt your cash flow. If you find yourself struggling to make payroll, one of the reasons might be having too many people on the payroll.
It isn’t uncommon for a contractor to call and lament that they aren’t making any money. When I ask how many employees they have, I’ll hear four, five or even six employees, plus the owner, and the company is producing $450,000 a year.
Three things can quickly cause cash flow problems in a construction business. The first is not charging enough for your work or service. The second is using a payment schedule that uses your funds, not theirs, to build jobs. The third is having too many employees.
Let’s do some math. The minimum salary the business owner should pay themselves for owning and running the business is 8%. If their company is producing $450,000/year, that’s a salary of $36,000. That isn’t much money for a family to live on in today’s economy, but that’s all an owner can take in salary at that sales volume.
After paying the owner’s salary, you have $414,000 left to pay employee wages and benefits. You also have to pay the cost of all materials for your jobs, and any subcontractors. Is that all? Nope, we still have overhead expenses to pay as well. When you add it up, you quickly find there isn’t enough money to go around.
Remember the $36,000 we calculated for the owner’s salary? The owner will probably also be working on jobs, so they should be paid for that as well. But the reality is, for all their time and trouble and sleepless nights, they probably aren’t drawing a paycheck at all because they’ll pay their employees first.
This problem doesn’t just affect businesses with $450,000 in annual revenue. It affects businesses with $5 million and $10 million in annual revenue as well. If you have too many employees for your volume of business, you’re eventually going to have problems meeting payroll.
We have charts in the book, Markup & Profit; A Contractor’s Guide Revisited on the appropriate volume per employee. Use those charts to plan your needed cash flow. Be aware of your numbers, know what’s right for your business and if you are having cash flow problems, check out your volume per employee first.
It isn’t popular to say, but I want to remind you that you aren’t in business to provide employment. You’re in business to provide a service and make a profit doing it. The service you provide is the jobs you build; it isn’t the employees you support.
That also means that if you don’t have jobs to build, you need to send employees home. Paying them to do busywork is an overhead expense. Unless you have a healthy buffer in your overhead budget to cover busywork, their pay is coming out of profit. In construction, employees should know that 40 hours a week is never guaranteed. If you are more concerned with having employees or keeping your employees busy than you are with building jobs profitably, your business won’t last and everyone will be unemployed, including you.
Cash flow problems only get worse unless you step in and analyze why they are happening, then take steps to fix it. If you need someone to look over your shoulder and lend a hand, give me a call. I’ll help you figure it out.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.
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