Profitable on paper, empty in the account

Transforming challenges into opportunities

The most common question an owner brings to a CFO is not about tax. It is why a year the statements call profitable produced no cash. The answer is usually in the mix of work, and it is usually visible in a month.

Challenge

Ray owns a specialty contracting business doing $6.2 million a year. The income statement showed a profit. The bank account showed eleven days of operating cash and a line of credit that never went to zero.

• Profit reported in aggregate. One number for the whole company, so a job type losing money was invisible behind the ones making it.
• Crew time not costed to jobs. Labor sat in overhead rather than against the work that consumed it, which flattered every low margin bid.
• No forward view of cash. Cash was known as a balance today, not as a position eight weeks out, so every draw and payroll was a surprise in the same week.
• Everything urgent. With no ranking of what mattered, the list of improvements had grown to a length that guaranteed none of it happened.

Strategic response

Standard CFO advisory, run on his numbers at a monthly cadence.

• Reporting by job type. Revenue and direct cost, including loaded crew hours, reported by category of work every month.
• A thirteen week cash forecast. Receipts and disbursements projected forward and updated weekly, so payroll and material buys were visible before they arrived.
• A cash flow target. A specific number the business needed to generate to reach his own definition of where he wanted it, set once and measured against monthly.
• Three objectives a month. No more than three, chosen from the drivers scored worst against the target, with the next steps under each named by Ray rather than by us. He is the expert in his trade.

Result

Nothing was refinanced and no tax structure was involved.

• One job type stopped. Loaded with crew hours it had been running below breakeven for two years. He stopped bidding it, and revenue fell while profit rose.
• Cash on hand from 11 days to 46. Within seven months, from margin mix and from collecting on a schedule rather than on request.
• The line of credit at zero. For the first time in four years, and kept as capacity rather than as working capital.
• Three things done a month. Rather than thirty listed. Fewer objectives accomplished beats more objectives ignored.

Conclusion

There was no financial product in this engagement. The business already contained the answer and simply had no way to see it. Once the reporting matched the way the work was actually done, the decision was obvious and Ray made it himself.