Overhead creep is one of those subtle things that business owners often don’t notice. Overhead creeps up – it doesn’t creep down. It can lead to cash flow problems real quick.
There are three things that lead to almost all cash flow problems. The first is not charging enough for your work. The second is bad payment schedules on your contracts, i.e . . . 1/3, 1/3 and 1/3 payment schedules. The third item that causes cash flow problems is when the number of employees and the resulting increase in overhead is more than the sales volume can handle.
Having too many employees for your volume of sales can sink your business quickly. We review this issue in great detail on pages 109 to 116 in the book, Markup and Profit Revisited. If you haven’t read this section, it should move to the top of your list. Cash flow problems are not to be ignored because unless you figure out what is causing them and make the correction, you’ll see your account payables increase dramatically without the funds to cover it. Trust me, that’s no way to live.
If you’ve created your budget and calculated your markup, if you’re using your markup correctly and estimating accurately, and if you’re getting the sales needed to meet your budget, there will be enough money to pay your overhead expenses. But if you have estimating errors that make your job costs higher than anticipated, or if you’re cutting your markup to make sales, or if you just aren’t making the sales, you can see cash flow problems very quickly.
Keep the number of employees in balance with your sales, and keep your sanity.
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.