Positioning A Building Trades Contractor for Growth ©

Background / Introduction:
Two partners jointly managed a building-trades contractor with $12 Million in annual revenues. The firm had three major lines of business:

The partners had recently launched another firm to manufacture the ductwork needed by the HVAC business line. This firm sold product to the parent as well as to others in the business. The partners wanted to spend more time developing this business to its full potential.

Both partners were very involved in running the business. Unfortunately, this often meant they were too engrossed in minor detail to pay attention to the bigger scheme of things. Like many entrepreneurs, they were working in the business instead of “on” the business.

The partners faced an interesting yet unexpected problem. Their efforts to break out of an industry slump and increase revenues had brought in considerable new business and the firm was busier than it had been for quite a while. However, payment norms schedules prevalent in the construction industry resulted in a severe cash crunch that left the firm scrambling to find funds to pay suppliers and vendors for needed equipment, parts and supplies.

Receivables aged over 90 days were slightly over $1.9 Million with Payables around $1.3 Million. This often resulted in the firm not having sufficient funds on hand to pay vendors and suppliers for immediate requirements which, in turn, in operational and procurement inefficiencies.

While the Plumbing and Service functions had managers heading the function, the Mechanical function reported directly to the two principals jointly. The Mechanical and Plumbing functions often worked side-by-side on different areas of a job site under the same contract. Consequently, they were quite aware of each other’s operational needs and performance. While the Service group would help the other two functions with labour as needed, it generally operated distinct from them.

Many of the firm’s senior HQ employees had been with the firm for many years. However, the Chief Accountant had been on-board for just six months. The previous accountant, fired for inadequate performance in the position, had not established proper and acceptable rules and procedures for the accounting department.

The accounting system had many quirks and features that made it difficult to extract useful information in a timely manner. Support from the vendor was virtually non-existent as it was an older discontinued product.

Initial Steps:
Preliminary discussions with the Principals about their goals, objectives and perceptions of what they faced, showed that they realized they had a cash crunch. They were quite busy dealing with immediate day-to-day problems and understood they needed help in defining and implementing plans to help them realize their long-term goals. Our prime objective in this area was to free them from mundane tasks and enable them to focus on growing and the business.

Meeting with various senior staff members to discuss their perspectives and daily activities uncovered a number of latent and unsuspected problems. Many of these problems crossed functional boundaries and exacerbated their effects. It became quickly apparent that we needed to launch a number of synergistic operations simultaneously.

The first and most critical priority was establishing proper cash management as the firm would not be able to function unless suppliers and vendors continued to supply needed product.

(To make things easy to understand, this paper discusses each operation as if it were stand-alone. In reality, we launched a broad-based range of initiatives simultaneously, each aimed at correcting a specific problem.)

Cash Management:
The first step in this process was establishing a reliable real-time process quantifying cash available at any given moment. As noted earlier, deficiencies in the accounting system prevented an accurate determination without extensive work. The partners had neither the time nor the expertise needed to extract information from the accounting system.

1. The Purchasing officer had been accustomed to transacting business over the phone without keeping any written records. He would call around various suppliers to negotiate the best possible terms and place an order over the phone. He would then send a hand-written purchase order to the vendor in confirmation. However, because he did not want to deal with the intricacies of the accounting system, he would not enter them there. This resulted in accounting, not having the purchase order as an advance warning, having to react on receiving invoices. The effort of verifying accuracy and allocating funds further complicated cash management.
   
   We worked with the Purchasing officer with the help of the Accounting department to show him how to enter purchase orders directly into the system. Besides reducing the overall amount of effort in tracking purchase orders, this also helped cash management by giving an advance warning of expected invoices.



2. The next step was creating a customized spreadsheet-based forecasting tool (maintained by accounting) that showed the payables and receivables due each week for the next thirteen weeks as well as the net available cash at the end of each week. Accounting updated the spreadsheet with customer/supplier specific details of invoices issued and received, and cheques issued and deposited daily. The spreadsheet design and accompanying programming automatically kept the information current.
   
   The underlying rules were simple: Rather than entering invoices as issued or received, data entry was by the date when payment was actually expected. Accounting clerks entered all issued or received payments in the current week.
   
   The spreadsheet showed available cash, after updating the starting cash on hand by cheques issued or received to date. At the end of the week, an automated process rescheduled all the remaining un-cleared payables and receivables and added them out to the subsequent week, and then discarded the previous week. The spreadsheet automatically discarded old data and kept current itself current.
   
   This tool was an eye-opener as it quantified the extent of the cash crunch and how (relatively) easy it was to reduce or eliminate problems in this area.



3. The work on the cash flow spreadsheet showed Receivables were slightly over $1.9 Million with Payables around $1.3 Million. According to commonly accepted industry practice, vendors generally accepted waiting for payment in line as disbursements trickled down from the final client to the contractor down to the subcontractors. This process resulted in aging A/R by 60 days.
   
   However, some of the receivables were almost two years overdue. The main problem was that no one knew the status of each receivable, whether it was disputed by the customer or any other reason for non-payment. The vast majority of the overdue receivables were from Service. As these were generally for relatively small amounts, no one had really paid much attention to them.
   
   Another item of interest was that quirks in the accounting system added 30 days to the aging reports. In other words, amounts shown as being over 90 days old were actually over 120 days old.

For starters, we assigned a clerk full time to calling on overdue accounts. Working from a prioritized list of delinquent accounts and with a prompter, she called each one requesting payment. If told the invoices in question were untraceable, she immediately faxed copies and followed up with a phone call confirming receipt. She then called the following week to request payment again. She logged her notes on closing each call. If the customer refused payment because of technical problems or complaints, the clerk requested further information and logged it as well

General Management:
With both partners actively involved in day-to-day operations, the staff quickly learned how to get what they wanted by approaching one, then the other, until one of them agreed. This often resulted in sub-optimal decisions. Being quite involved in the business, both would also work out the details of problems instead of delegating resolution to senior staffers. This left both unable to focus on business development and growing the business

1. The first thing was to have a single person in charge. The senior partner agreed to devote his time and attention to another of their joint ventures leaving the other partner in charge of this one. This decision was announced to all staff and put into effect immediately.



2. The new President was presented with a job description that outlined his tasks and responsibilities. The next step was training the new President in the art of delegation. He now was to ask any senior staffer coming to him with a problem for two or more alternative solutions for him to choose from. While this was difficult at first, he quickly learned, as did the staff.



3. We then split the firm into three divisions, HVAC, Plumbing, and Service, each with a newly promoted Divisional Manager (DM.) Each position was delineated with job descriptions that clearly spelled out responsibilities and corresponding authority.



4. A management team consisting of the President, the three DMs, the Purchasing Manager, and the Accountant, made overall management of the company much made easier. This team met each week to review current developments and decide on the best way to coordinate efforts in accomplishing the company’s objectives.
   
   One of the Management Teams first objectives was bringing the Accounts Receivable problem under control. The A/R clerk came to the weekly meeting with her notes. The appropriate DM contacted clients who said they were unable to pay until problems were resolved, and worked out any impediments to mutual satisfaction. A collections agency handled old and otherwise uncollectible invoices.



5. An immediate benefit of this approach was that with a specific person assigned responsibility, things no longer fell through the cracks. The assigned DM addressed and resolved all problems and ensured payment in full.

Other Initiatives:

1. A job description (JD) outlined responsibilities and expectations for each position in the company. The JD included a performance appraisal form. Every employee now knew exactly what was expected and how he/she had performed.
2. Performance on the job tied into a new Incentive program that replaced the existing annual bonus program.
3. A number of spreadsheet-based decision tools helped in costing out proposals and in pricing. They enabled management to optimize labour resource allocation.
4. Revised Time sheets combined the usual labour tracking needs with tracking and managing miscellaneous field expenses. Having Field Supervisors verify and sign off on each timesheet eliminated second-guessing at HQ as to who had really worked where. This revised process also eliminated problems with reimbursing employee expenses.
5. Since the existing Accounting software, besides being old and cumbersome, could not support the company’s needs, we researched available products and initiated the purchase and installation of a new package that integrated the needs of all functions.
6. We also revised and brought the Company Employee Handbook up to date.

Summary of Results:

1. Revenues more than doubled, going from $12 Million to over $26 Million in just under a year. This was a direct result of freeing the President to focus on business development.
2. Accounts Receivable over 90 (actually over 120) days dropped from over $1,900,000 to around $300,000 within 4 months.
3. The influx of cash enabled prompt payment to vendors and opened a wider pipeline to a larger selection of vendors to Purchasing. Another welcome result was much better pricing and terms with a direct upward boost on margins.