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Margin vs Markup | Cash Flow Crash Course
A cash flow crash course from start to finish.
When we look at cashflow, we want to talk about the differences between two very common words “margin” versus “markup”. And what that really means to your project cashflow and also ultimately your profitability.
Transcript
Michael Williams:
Our webinar is going to be a cash flow crash course from start to finish. We have a really great partner of ours Mobilization Funding. Who’s, uh, he’s gracious enough to lend their time and, uh, and go through this topic with us, which is super relevant to hopefully everyone on the call. Um, so on the call, we have Scott pepper and Andrew Schwartz with Mobilization Funding, and they are going to lead our call. I’ll be jumping in and out to moderate to questions. So again, don’t hesitate to type your questions and at the bottom of the screen. Alright, Scott, over to you.
Scott Peper:
Michael Thank you very much. And Justin, thank you as well, especially at Levelset. you guys are a great partner of ours. We’ve really enjoyed working with you guys and I’m doing these types of things. And these types of webinars are right in our wheelhouse of what we’d like to accomplish with me today. I have, um, one of our colleagues and my teammate here at Mobilization Funding, Andrew Schwartz. He is in charge of all of our underwriting. He’s our senior underwriting manager. He really looks at each and every deal and works with the team to put through each of these cash flows on a project. So he’s got a special knowledge from financing many, many different types of projects and also many transactions, um, in his investment banking days. So he’s going to be great to help walk through some of the cash flows with us and some of the items, but Andrew, do you want to say hello?
Andrew Schwartz:
Hi everybody. We like to make these presentations very interactive as Michael had said. So if you do have questions or you want us to stop, we can go through this very interactive manner.
Scott Peper:
Um, so let’s take this casual. If there’s a question, please raise your hand, hit the chat button, ask away if it’s relevant to them, the spot we’re in, or if it’s something we’ve already passed, I have no problem addressing it with you guys, but we’ll make sure it does get addressed at some point throughout. Okay, so we’ll get started quick. Um, today’s agenda. When we looked at the cashflow, what are we really want to do is just talk about the differences between two very common words that we think are interchanged, but they mean a lot things different. And we hear that from our clients and others and that’s margin versus markup. And we’ll touch on that a little bit and what, what that really means to your project it’s cashflow and also ultimately your profitability. And we also still want to look at how accurately you’re estimating your costs and the impact they have to a cash flow project.
Scott Peper:
So you can create a bid. That’s going to be perfect for you or at least the bid that you intend or think you’re submitting. And then lastly, um, how you can properly map that out on a week by week basis, at least starting from the beginning of the job and moving your way to the end, knowing that things are gonna change, but at least you can have something to start with in mind, and then the information that gives you and the ability of what decisions you can make off of that. So that’s what we’re going to run through to now. So we’ll start here. So why should you even have a project cashflow? What’s the benefit of it? Well, first and foremost, establishing the costs of your project is key in order to estimate what you should bid and then ultimately to see what your profitability is.
Scott Peper:
I mean, I know we all leave our houses and we would all leave to go to work. We leave to make money. If you’re not making money, the process of leaving and having the business is not worth starting in the first place. So getting it on paper and seeing what you intend to do and what you intend to Mark it up as, and making sure that you can actually have a plan to execute, making that much money. That’s what the cashflow is key for. Also determining where in the project to use the cash that you do have. So, you know, everyone knows in construction, you start off putting a lot of money out and it takes a while for that money to come back, you know, working for 30 days, putting an invoice in at the end of the month and then waiting 30 days, that’s a typical scenario.
Scott Peper:
Well, that’s 60 days that you can be spending cash going out the door without any money coming back in the door. And so starting in that position until you can get yourself to what we call a positive cashflow, meaning the amount of money you’ve put into the job is equal to the amount of money you’re taking out of the job. And now you have enough to move from the next month to month without having to come up with either alone or supplement the actual project with funds in your business already. That’s what we’re going to look at here. And then proactively looking at the cashflow, it does something very, very powerful. And this is the piece that we see most of our clients find the best benefit from knowing what you’re going to drive at throughout the steps in each, each week to week or month a month, and knowing how to solve for that problem by seeing it on the cashflow early. So if you know, in week six, for example, based on your schedule and you’re going to estimated billing is going to be, you see that you’re going to have a cashflow shortage and it’s because you have a supplier payment that’s due, or you need to need to put a deposit down for materials that you haven’t ordered yet, or equipment it’s going to hit the land on the job. And you can see with that shortage shortages,
Andrew Schwartz:
It gives you the ability weeks in advance to find a solution. Maybe that’s worked something out with the general contractor. Maybe that’s negotiate a better term with your supplier, et cetera, but it gives you the information and then the power to be able to solve for that. So let’s talk a little bit about, um, markup and margin and making sure in your bid you’re including what we see a lot of times as a miss is the overhead allocation. And so overhead in a bid is key to us because one main reason, and that is without allocating overhead to it. Overhead is what makes your job so negatively cashflow poor, that it actually ends up hurting the job. So if you factor the labor costs of the job and the material costs and the equipment cost, but you forget to allocate some dollar amount in your bid to insurance, rent, or other overhead salaries, um, administrative positions, it really puts you in a bind when you’re utilizing dollars from that project and having to pay those items. So we’re going to show you in this cash flow model that we’re gonna put together, how you can, when you’re bidding, how to actually calculate what your overhead allocation is and then what it should be, and then how to incorporate it into it.
Scott Peper:
So let’s go through that real quick overhead allocation is easy things to include or overhead that is most important are going to be here on the screen. Basically your rent, your mortgage insurance payments, any other debt, payments, utilities, telephones general office staff that aren’t allocated to specific jobs, um, vehicles, your health insurance benefits, any marketing or entertainment and gifts, things like that, that you need to figure out the easiest way to calculate that is take all those items that you spend on a monthly basis. You can get that right off your budget. If you’ve put together an annualized budget or use last year’s actuals or whatever portion of the months that you do have available to you and calculate that those monthly costs on what they are, basically your fixed expenses from there, you can then multiply that times 12 to get your annual expense, overhead allocation, and then to get the percentage you need to figure out what your total revenue is going to be for that year.
Scott Peper:
So for example, if you allocated in budget, what jobs you have for the year and you know what they’re going to be, and you can have a pretty solid guessed of what your revenues are going to be for the year of great use that number, if not a real simple way to do it is take what, take what your revenues were the prior year, and use that as a fixed number. So run through an example for you guys in a simple world, if you had a hundred thousand dollars of total annual expenses and you planned, or the prior year, you did a million dollars in sales that essentially 10% of your total revenue was allocated to overhead expenses. That’s what you needed. You needed a hundred thousand dollars of the million to cover rent, insurance, mortgages, debt, payments, et cetera. So you would have a 10% overhead allocation.
Scott Peper:
Now that’s a great number, easy to see. It’s great, but what do you do with that next? So if you know that it’s 10% and you’re moving into these new bids and you’re putting estimates out and you do your normal course of a bidding, the job where you’d figure out what your material costs are going to be. You figure out what your labor expense and the other raw costs, material, equipment, et cetera, and that you’re going to bid a job. And let’s just say, for example, that job, those costs of the job come up to half a million dollars. And then you want to allocate margin to that. And let’s say for simple simplicity sake, you want to make a 20% margin. So you add 20% to the half a million dollars. We would call that a markup. And now you’d have a bid for essentially $600,000 and you’d submit it.
Scott Peper:
The problem is, is you haven’t allocated anything to overhead yet. And so in using that example at a 20% margin, if you had a 10% retainage on that job, you’re going to be working with only 90% of that $600,000 number anyways. And then if that other 10% is going to have to go to overhead, you’re essentially going to have to operate that project with literally the exact amount of dollars you’ve allocated the 500,000. So what you need to do in those in the bidding job is look at that half a million dollars, add your markup and percentage, get to your 600,000 and then look at okay for overhead, add an additional 10% to every one of my jobs, because if I don’t, I’m going to end up in that cashflow shortage. So in this case, you would need to bid somewhere between 600 and $660,000 to make sure you can account for the overhead account for the margin that you’re going to get in pre K then during the project, the free cashflow cause retain is you’re not going to get to the end of the job.
Scott Peper:
So you’ve got to remove retainers right off the bat. And so a lot of customers will say, well, that’s great if I could spend that much, but then I won’t win the job. Okay, no problem. That’s a fair point. And then allocating that overhead and figuring out where you can save in some of your expenses. This is the power and the tool that will give you that maybe you don’t buy those extra vehicles, right? Because you don’t have the amount of money that you need to allocate for the overhead, or maybe it’s not the right time to make the decision to add new employees or your cost structure is too high. Those are the types of power and tools that you’ll be able to use and decisions off of that. So looking here, if you know how much the work is going to cost and how much you’re going to make and whether or not you have enough cash to complete the project, you can then build your schedule and the schedule values of how you’re going to build a job, invoice the job to fit and accommodate where those cashflow shortages are going to be.
Scott Peper:
So hope that makes sense and big picture. And we’re going to walk through this cashflow tracker. Now with you a little bit, just kind of give you an idea of how you can see the job cashflow throughout the, throughout the steps. So if you look at what your margin’s going to be, you think about how much money you want to make off of them. The key now is you using this cashflow tracker is going to help guide you into that project and utilize the dollars you do have available already in your business that you can allocate to that job. Or if there’s a shortage of a dollars where other dollars are, can you find in the project or from alone or from a funding source, or can you borrow from yourself and put into the business somehow you’ll know exactly what those dollars are you’re going to need.
Scott Peper:
And when, so here’s a sheet that we utilize. We created this sheet with our customers in order to be able to determine all of the items that we just talked about before, because if a customer’s coming to us and they want to understand, um, from us, Hey, I need to borrow X amount of dollars to execute the work on this project. We want to know exactly how much they need and where in the project they need it so that we can help them to do two things. One, make sure we can give them the amount they actually need. And number two, help show them exactly the most efficient way to borrow the money from us and pay us back the quickest so that they can maintain the margin and the dollars that they want to make on the project. And then also be when you do have the cash you need, when you need it, can you gain any efficiencies? Can you save money on the job? Meaning if you could start the job earlier with more people that can help you get ahead of schedule. That’s great. Let’s do that. Maybe you can shrink a couple of weeks of payroll off of what you budgeted in the job.
Andrew Schwartz:
You could also get a couple of percentage points off your material costs. If you’re able to pay up front as opposed to taking a net 30 or net 45 terms. Exactly.
Scott Peper:
So I’m going to have Andrew walk you through the basics of this sheet, this cash flow. She is just an example. You may have budget sheets. There’s certainly software that you can build out your bins with, or for your project cashflow. But this is one that we’ve used to help with customers of ours. And it seems to give you at a very high level, enough detail to make the big picture decisions. And we’ll, we’ll, I’ll let Andrew walk through with you and show you how it works. Now, we are going to give you guys this, this actual cashflow model and the instruction guide when you get finished with this. So you don’t have to worry about taking notes or snapping pictures. You’re going to actually get the actual Excel file and you’ll be able to download with instructions on how to use it. So Andrew walked through with now,
Andrew Schwartz:
Hey guys, so this is the tool we use with every one of our clients. So many of them have come back to us and told us, thank you so much. I’ve never looked at my projects like this. And it really gives you a top down view of what your expenses are on weekly basis when things need to be paid as well as seeing your projections for when your funds from the prime are going to come in. So we’ve broken this down into four sections. I always start with your costs, each line item, and this can be crafted specifically to the things in your trade. These are the things you’re going to have. You’re going to have your employees, your direct labor on the job. Maybe you’re subcontracting it, subcontracting out part of it. So we’ve got a line item for that. Your materials are equipment rentals.
Andrew Schwartz:
If needed bond premiums, as well as a miscellaneous line item. These are just the basics. And again, we’re giving this to unlocked. You can craft whatever is perfect for you. Maybe you use union employees and you want to break out the union dues on top of your labor costs. You can do that in this sheet. The top section is your projected pay apps. You plug in the percent of retainage on your job, and it’s going to calculate what you can actually expect to get when that pay app is approved and sent to you. One of the things to consider though is say, week four is the end of the month. You’re going to put that in there when you’re invoicing it. But mentally you have to take into account. You may not see those funds for 35 or 42 days, depending on what stipulated project, the next section down is your sources of cash.
Andrew Schwartz:
So we’ve given you three to start your free cashflow from your business operations, what money you have sitting from other jobs you guys have accomplished already and finished the receipt of your pay apps coming in from the prime and then cashed phone Manny financing. So versus whether you’re using someone like us, you’re factoring, you have a bank line. Those are the dollars that you have availability to get you from point a to point B on your project. The very bottom section is your uses. The total costs that you need to provide every week from your employees, from employees to your suppliers. Maybe you have SSVs that you need to pay on another job. And that bill is now due. And then your payment for financing.
Scott Peper:
I wanted to walk through a quick example on that. Um, here, you’re looking at your weekly project costs. Let’s just use material cause that’s a simple one and labor labor. You incur the cost up here and you also have to pay the cost pretty much in the same week or the very next week. So if you have a $5,000 direct labor costs that you incurred in week one, you’ll have to pay for that in week two. But for example, if you have a $5,000 material cost in week one, meaning you ordered it in week one, but you have a 30 day terms with your supplier. Then you wouldn’t have to use your, your uses or sources. Wouldn’t impact that $5,000 material bill until week four. That’s the difference you can see,
Andrew Schwartz:
Sorry, Scott.
Scott Peper:
Yeah. So I just wanted to give an example of that and then you can be an instruction guide to go ahead, Andrew.
Andrew Schwartz:
Oh, in this case though, we’ve made this really simple for you guys. If you know that that material cost is going to hit you on week four, you move the costs over to week four and it’ll carry down automatically for you because it’s due that week. So if you know, when it’s going to be due, based on your individual terms, you put the cost where it’s going
Scott Peper:
To be incurred. So this is just to grow a snapshot of it. We’ve kind of touched on these individual points a little bit, but now we’ll go through them section by section. You know, we look at everything on a weekend basis or a Friday basis. Maybe you start your week on Monday. You know, that’s why we’ve numbered the weeks. Just one through has many, as you need for your specific job, you’re going to submit your pay app, maybe of net 30 with the prime, probably be conservative. If it’s later, what not move the expected date a week or two past the contract terms. That way you can get a really realistic view of the timing of your cashflow coming in. It’s something we do just to worst case scenario. How does that impact things? And you should look at it for yourself also, especially as it relates to, you’re going to be using some of those funds for your overhead as well. You really got to know when your cash is available for you to use it.
Scott Peper:
So on your weekly costs, you know, maybe you’re paying payroll every other week. So in week two you would put two weeks worth of labor. Subcontract could be paid when paid. You don’t have to put that fee down until your pay app comes in. But again, this is all subject to your individual needs. And your terms with the guys, you’re doing business with a key point, and we’ve got this question before, so I will address it here. As everyone says, why do you guys not count retainers? Why do you take, what do you get rid of that when building the cashflow model and the answer for us, as simple as what we’re worried about with this cashflow tablet is when can, can, when can the job, or can the job cashflow itself and in a typical scenario, usually a job will start to cashflow itself after you’ve invoiced 50, to maybe 60% of it and been paid that 50 or 60%, usually the job can start to cashflow in a perfect world.
Scott Peper:
However, if we count retainage, knowing that retain, isn’t going to be paid until the job’s over with, it’s going to give us a false sense of security. So we just remove it completely from the equation. And ultimately it’ll give you a real true feeling of what that’s going to, what this is gonna look like week to week from cash in and cash out in the day to day life that you’re living, trying to execute and finish the work. So that’s the purpose of it. And in a perfect world, you finished lots of jobs and they all cashflow themselves, or you finance them properly. So they do. And then as you start earning that retainage, that’s what you utilize to build up your nest egg. So you start financing some of these jobs yourself, that’s the cash that you’ll be able to utilize in your business. And that’s why we’re walking
Andrew Schwartz:
Through. That’s why we walked through the bid process with this as well. Go ahead, Andrew. What we’ve done is we’ve got a totals column for you guys as well. This is going to total everything for you. You will see your total invoice amounts minus the retainers that it comes when it comes in the end versus your total expenses at the bottom. We’re going to give you your gross margin, as well as the margin, as a percentage of your project. Total really good way for you guys to see just exactly what this project is going to be for you as on a profitability basis. And you just have to take that number and recognize if you don’t have your overhead numbers in your expenses that you still have that to pay. So that number you see isn’t actual for you.
Andrew Schwartz:
Let’s go on to the next section, Scott. Okay. All right. I touched on this earlier, your free cashflow from your business, retaining it from a previous job. You have funds sitting in the bank funds that your family will come together to help you with that’s your free cashflow receipt from prey op net of retainers. Those are the actual dollars that hit your account and cash from financing sources. I wouldn’t necessarily include a factor in that if you happen to be using one, because they’re really just factoring the receivable from the prime. This is going to be, if you have a letter or a line of credit with a financial institution alone, from somebody like us and the dollars that are going to be available to you, based on your loan documents, we touched as well on the uses earlier, what is your weekly nut? What do you have to have to be able to put out each week?
Andrew Schwartz:
Anything you owe your suppliers and any payments. And if your guys are happened to be using something like an MCA, which we all don’t not like whatsoever because of how detrimental they already your business, you will see that line be exceedingly high and affect your cashflow on an ongoing basis at the bottom, you’re going to see your net weekly surplus or deficit. Do you have a surplus at the end of the week, or you going to need to plug a cashflow hole? That’s where you can just determine whether or not you’re going to need some help along the way through the form of financing or a different investment vehicle to get you through this project.
Andrew Schwartz:
Next slide please. Gary, we see the example. We’ve got a hundred dollars from our business that we use in week two. However, at the end of that week, we owe $200. This week. We have a hundred dollars surplus. What’s what’s that from it’s either our payroll was more than we had or less than we have, sorry, more than we had that week, or we owed a supplier. So you have the opportunity. When you see these holes to do one of two things. One, you can talk to your suppliers about extending terms for at least for this particular project, or you have to find the cashflow via a loan of some kind or negotiations with the prime is the payment terms on your contract. That’s why this tool is so beneficial to you guys to accurately understand what your project is going to cost on a week.
Scott Peper:
Let me go next one, please. Okay.
Andrew Schwartz:
And again, here we see it. When we sum it out to the end, it’s going to show you what your overall deficit or surplus is. So maybe you’re thinking about a bid using this, and then you start looking at your expenses and realized I can’t make this bid because it’s going to cost me X dollars that I needed as profit. So you should really use this tool while you’re working through the bid process on the front end to fine tune. What you expect out of a project as you’re bidding it. Now I’m going to ask if there’ve been any questions about this so far,
Scott Peper:
Looks like we don’t have any questions so far. I’ll jump in. If any new ones come up, the main, the main interest is people want to make sure that they have this tool. So it’s great that you guys are going to be sharing this along. We’ll be sharing the recorded audio as well. So people can go back and dig into this if they need to. Perfect. What couple of points I wanted to make on this, um, that I think are relevant. They come up a lot. Is you thinking about this tool is good and the information is great, but how can you do it? And Andrew brought up a great point. We just had a customer, um, literally happen to be electrical contractor. They built out the cash flow with us and we’ve done many different projects with them, but this particular project was going to be a little tougher, happened to be a school.
Scott Peper:
And the school district County actually happened to pay a little slower than normal. Laying that out this cash flow project showed it, showed them that their supplier, that they were going to be utilizing was going to really come up with. When they owed that supplier, it was going to really have three or four key weeks throughout the project when payments are going to be due to the supplier, but they weren’t going to have the money for it yet. And instead, what they were able to do is take this flow tool, go into the credit manager at the supply house and say, look, I don’t need to have 60 day terms for all my projects, but I do for this one. And here’s why, let me show it to you. And they showed them the cashflow tool. So they sat with the credit manager, showed him the cashflow chart, and here’s the reasons why I’m getting paid.
Scott Peper:
Here’s my job. I have good margin in it. I’m going to be in a good spot, but because of the way that the County and the school district is going to be paying me, it just is going to make, it’s just going to jam us up here on our credit terms. So I don’t need, I just, I just need you to give me an extra 30, you know, an extra 15 to 30 days here on this job so that I can go ahead. And one of these monies come in and pay you. And you know what? They came back and said, you know, because they had the tool because the credit manager had the information and it wasn’t just them asking for better terms. And they were able to avoid that conversation or make the credit manager more comfortable. It was an easy question for them and they got the, they got the terms they needed for that project. And it was great because they didn’t have to go borrow extra money. They didn’t have to worry about being late, or they didn’t have to take money off of another project to try to pay for this one, to keep up with their credit supply. So it was a really good, powerful tool, but this is the, these are the kinds of conversations. I just want to give you an example that you can have using this to solve for. What’s usually a very recognizable normal can problem in the construction job.
Scott Peper:
Um, Andrew, is there anything else you wanted to touch on, on that last slide?
Andrew Schwartz:
No, and it’s a great tool and I, we rely on it. As Scott mentioned, this is something we have our clients fill out each time they make a request to us based on a specific project. And a lot of them will just look and say, I never realized what it really looked like. So until you start trying it out and doing it, you won’t recognize for yourself just how much more insight you get to your business and projects. So I hope everyone who’s watching opts to use this. And if you have any questions or comments, please feel free to call us directly on them and we’ll walk you through them.
Scott Peper:
One of the things I wanted to add to that is too. And I put on this slide here is, you know, proactively solving problems that you know, you’re going to have is huge. If you can come up with solutions for things in your own business, that you know, you’re going to have this issue or problem horizon, you can solve for it. So it doesn’t become a crisis. It’s just going to give you so many hours and days back in your week, your employees will be happier. Your supervisors, you, and most importantly, your customers, I mean, you want to work on a job. You want to perform it. You want to do it in an efficient, good way for you and profitable, but your customer also wants you to do that as well. And that natural tension that goes between the general contractor and a subcontractor or directly to the prime prime to GC or versus any combination of that it’s easily with, with good information and think about how well you can separate yourself.
Scott Peper:
If you’re going to those general contractors or your customers in advance, say, Hey, look, this is going to be a problem in this week, but this is how I’m solving it. And I need your help to do that. You know, I’m going to need you for this pay app to figure out a way to help give me X or, and here’s why, and having those conversations in advance, going to give the general contractor, the confidence to know that you’re thinking things through and that you’re making sure their schedule, you can keep up with and it’s going to separate you from your competition. And when you do have those conversations and then actually follow through and execute and do the great work, they’re going to be so much more apt to go to you for the next project. And the next job, giving you that information. You need an advance that you can win that bit. Those are the things that we’re, we’re, we’re trying to help you guys with now, and that we seen our customers be able to do with these kinds of, with this kind of information at their disposal.
Scott Peper:
I think, um, that’s, that’s it on here? Um, big practice wise. I want to try to get to some cool. I want to try to get some questions for everybody. Hopefully there are some, but I’m creating, you know, plans for growth, how to figure out these projects. We can touch on any topics that can utilize these cash flows and how they can benefit small to small picture. Just the one project or big picture, how each one of these little cash flows can then turn into what is a big cash flow for the business and how you layer the projects in. So you can really see where you want to get to and how, and, um, what’s the, what’s the right dollar size, you know, do you want to be a two, $3 million company, a stay a $1 million company? Or do you want to grow to 10 or 12 million? And what is that going to take to do that? That’s what these little cash loans for each project can build onto what is really one big cashflow for your business?
Michael Williams:
Yeah. Well, Scott, Andrew first, thanks. Thanks for putting this together. Um, we’ve gotten a lot of praise in the Q and a section or the chat section, so it’s definitely valuable for the attendees. We can take some more questions and answers, but why don’t we skip to the last slide? I think it has your contact information. So that way of, yeah. So if anyone on the call has any followup questions, you can reach Scott, Andrew or myself. I’m more specifically to this topic, Scott and Andrew are going to be your go to sources for that, but I can also direct you guys to them. Um, but if anyone has any additional questions, then go ahead and type those in, in the, in the chat box or the Q and a section while you guys are doing that. I would add to, um, if you have found this to be very valuable one, I appreciate it.
Scott Peper:
We try to put as much of this information, um, via our website, but also on our YouTube channel, you can go to the YouTube channel and Mobilization Funding is what it’s called. And there’s tons of little short clip videos on there. Other, a longer clip videos that give you guidance on cashflows, bidding margin versus markup, um, other information on different types of finance. And you can find a lot there. Um, it’s all free. It’s a great tool to utilize, to find some information, to kind of just educate yourself on your own without having to talk to people you don’t want to talk to or whatnot, please utilize that. Um, and if you like it, if you subscribe, you’ll get to you’ll, you’ll find out anytime we’re posting new stuff on there, which is pretty much almost every week or every other week at a minimum.
Michael Williams:
Okay. We have, we do have a question from Dan Rogers to Scott. Uh, can you share how this tool may or may not work for industries outside of construction? Like trucking or manufacturing?
Scott Peper:
Yeah, absolutely. Um, it works. It’s the same cashflow model we use when we do finance manufacturing businesses or trucking, essentially your costs are going to be exactly the same. And if you look at the sources and uses section, and also what you’re going to invoice, obviously in a manufacturing setting, you may, you most likely will not have retain. And so you would just leave that blank as, or zero. Um, but in a manufacturing setting, it’s really the uses. Your sources of cash are going to be the same. Either have financing your own receivables or money in the business. Your uses of the cash are gonna fit the same way. Usually it’s labor or materials or some other type of, um, utilities perhaps depends on what you’re manufacturing could be a lot of different suppliers.
Scott Peper:
And the difference there is just sometimes do you have progress billing, like construction, where you might be able to, if you have an invoice for a million dollars and you’re going to deliver a hundred thousand dollars in that invoice every time your purchase orders for a million from your customer, but you’re going to deliver a hundred thousand dollars every other week. So you’d be invoicing a hundred thousand against that one big PO, or then you’d allocate it very similar to construction. If it’s a million dollar PO and it’s going to take you eight weeks to do it, and you can only invoice it at the end of eight weeks. Well, then you’re just going to have one period of time. You’re going to go out to week eight in this example, and just put a million dollars in there. And that’s how that’s how you would use it. But no, you would use this exact same cashflow tracker to give you the same information. We do it all the time. We use the same exact sheet. We just don’t calculate retainage. That’s a good question. Thank you.
Scott Peper:
There was also a hidden question kind of in one of the, a, in one of the praise comments for you guys, um, and it kinda talks about the race or the issue of the race to the lowest bid. And so kind of reading between the lines there. Can you guys provide some sentiment on maybe how you advise your clients on maybe passing up on a job or, or understanding kind of where that, that breaking point is of saying, you know, if a bid is too low, it may not be beneficial for you to take on the job. Um, and so maybe provide some, some guidance around there of how justifying building in your ideal margin, and then also having a floor of, you know, where you would need to pass up on a job. Yeah. They, you know what, that’s an excellent question. And it is real because it’s easy for me to sit here and say, add 10%, right?
Scott Peper:
But you’re not going to win any jobs. So there’s really two mechanical factors to that one. There’s what you perceive you’re gonna win or not win. And you never know until you bid. But what I would say to answer the question first is if I tell you a story, we had a drywall contractor came to us last month and they were trying to get in with this new customer. Their current business was in pretty good shape. They didn’t have any major issues, but they were running pretty thin on, on from a cash perspective. They didn’t have a lot of dollars in the bank. Um, they had good work. They were good doing good work and they were making money, but they were, it was really a thin, thin margin. And they wanted to take advantage of this brand new customer that was going to be building a lot of, um, buildings.
Scott Peper:
They felt like they were going to get a lot of runway with them. So they bid the job really small, really thin to give you an idea. They used to, they usually were working off of different government projects that had a 5% retainage on the job. And it worked well for them. This particular job was going to be private. It was multifamily how multifamily housing developer had a 10% retainage. Well, they bid the job the same way they normally would. They made it a little more aggressive and what they never calculated was they had a, they had a 12% margin on the total job, which usually they operated between a 15 and a 20 more likely close to 20 well, would that 12% margin on the job after retainers, they were operating off of a, a 2% margin on that entire project, which means they only, they have no room for error.
Scott Peper:
We call it like engine underwriting to perfection. They’ve they’ve engineered what was going to be, uh, an 18 week project to complete perfection, where they only had a 2% variance to even make a mistake or not. That meant that’s something as simple as customer takes an extra week to pay every single month, or if the customer didn’t pay, or God forbid, there was a problem on the job and they had to incur any extra costs. They only had 2% of the whole job to factor that in. Otherwise that job was going to be what we would call cashflow negative. And if a job goes cashflow negative, we’ve we all know you pretty much can kiss your retainage goodbye. If a job gets cashflow negative too soon, too early, the likelihood of finishing it without problems is going to be really hard. And if the GC has to step in, or you have to hire additional work or subcontractors or any extra costs, it’s going to eat into what otherwise was going to be your profit that’s being held in that retainage.
Scott Peper:
So we advise our customers first, the information in that example, then let them know, look, this might not be the right time for you to be able to go do this type of project. It might not be the right it’s time to bid for this customer, or if you do, and you must do it, you’re going to need to save costs. You’re going to have to face, can you do this job any more efficiently it, can you get on it and finish it sooner? Can you, you get rid of some of the debts payments. You, you may be burdening right now. Can you borrow dollars from yourself to put into the business to reduce the impact of the cash that you need? It’s those are all good choices and good decisions, um, to make that, that investment in that project to gain that future customer.
Scott Peper:
But you gotta do it with the right information, and you have to know what you’re getting yourself into. Uh, in that particular case, this customer actually did not do the job cause they would have, it would have really buried them based on where they were and they didn’t have the ability or other dollars they could have put in themselves into the business to help finance that. So those are the types of things I would, um, encourage folks to look at and be really careful when you do get in those jobs. Then if you go to a financing source, you, you find the right one that won’t hurt your cashflow. For example, the reason Andrew brought up merchant cash advances, daily debit loans, you know, weekly debits. And the reason why we are, we talk so strongly that they’re not good for many businesses, but especially construction is because in the nature of a construction job, you do the work upfront, you get paid monthly, you have retainage, you know, absorbing the financing costs of a merchant cash advance is bad enough in one setting, meaning it’s just very costly, but what’s more damaging is the fact that you might get that bolus of money upfront.
Scott Peper:
But now having that hit your account on a daily basis, ultimately just really streamlines your problem. Anyway, you’re going to do you have a short term fix maybe that week to make the payroll or by material, but all that happens over the next few weeks as your cashflow gets deteriorated, even faster because you have to pay it back every day versus if they didn’t make you pay it for 12 months, it’s a different story. You don’t have enough time to gain any profit in order to pay back that debt. So, um, I hope that answers the question, but yeah, you have to be very strategic with who you’re going to bid for them. Maybe your overhead is just too expensive. You know, you know, a lot of people have a lot, a lot of businesses carry ourselves included. We did this for many years early on.
Scott Peper:
We had too many people, this felt great to have this many people, but we needed to do more with less, you know, and I mean, we probably had 30% more people than we needed in our business. We kept, you know, we’re all guilty of this. We kept the wrong people around too long. Um, people that we thought were a good fit weren’t that we had to get rid of. ’em if anything, what we learned in COVID we learned very quickly that you gotta do more with less and you know, we’ve, we’ve had, we had some downsizing and we had people staying come and go, but we’ve, we’re, we’re actually doing more with less people now than we did prior to the coronavirus hitting. So you gotta really look at internally and assess what your cost structure is, which is why it’s so important to do that. Overhead allocation.
Scott Peper:
Hope that answers it. Sorry. I was a little long winded, but I wanted to give a good, that’s a great, great topic. And we hear about all the time. Yeah. Yeah. That’s great. That’s a really helpful context style. I often think, you know, sometimes saying no to one job can open up, you know, you’d rather take, take maybe a smaller job with a healthier profit margin. That’s more sustainable than trying to step into a really large job. I know we can all get attracted by the huge dollar signs of a big bid, but if it doesn’t make sense from a percentage standpoint, you’re better off not taking on that job. So it’s a really good reminder to us all, to take into account more than just the size of the bed.
Scott Peper:
It’s no different, we love making loans. I mean, we want to go and take every loan and we want to say, yes, we really do. But if, if we, uh, if we do alone and it doesn’t work for our customer, which inherently means it’s not gonna work for us either and no one wins. So it doesn’t do that. Then that feels much worse than not doing a loan at all.
Michael Williams:
Absolutely. Well, it looks like, it looks like we went through all the questions. Scott, Andrew really appreciate the time and thoroughness and putting this together to all the participants. Thanks for, thanks for joining. If you have any questions, you have their contact information a year with mine as well. Um, we’ll send a recording of the webinar to you guys, and then we’ll make sure that you guys have a copy of this, uh, of this Excel document that the guys at Mobilization Funding put together. Um, so we’ll be in touch with everyone that participated. And again, thanks for your time and, uh, hope you have a great rest of your day.