A classic case of robbing Peter to pay Paul occurred recently. One of our clients called in with cash flow problems and couldn’t figure out what was wrong. Leads were coming in, sales were good, production was good, correct number of employees for the volume of work produced, but no money.
So we reviewed what was happening inside the company. The level of sales supported an owner’s salary to date of about $35,000, but they had drawn out over $60,000. The result was not enough cash to run the business.
Here’s how to see if this could be your problem. Assuming you use the appropriate markup, divide the amount of money you (and your spouse) have taken from your company by point zero eight. The result must match your total sales and production for the same period of time or you will also be experiencing cash flow problems very shortly.
Remember, this has nothing to do with how much you need or think you need to live on. The subject is how much salary the company can support. If you overdraw the company’s ability to support, you won’t have a business very long. You either must sell and build more business, or cut back on the amount you take from the company. You must keep it in balance for proper cash flow.
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.