The following is the written plan for a work shop given on Cash Flow Engineering.
“An engineer is a professional practitioner of engineering, concerned with applying scientific knowledge, mathematics, and ingenuity to develop solutions for technical, societal and commercial problems. Engineers design materials, structures, and systems while considering the limitations imposed by practicality, regulation, safety, and cost.The word engineer is derived from the Latin roots ingeniare (“to contrive, devise”) and ingenium (“cleverness”).
“Engineering (from Latin ingenium) is the application of scientific, economic, social, and practical knowledge in order to invent, design, build, maintain, and improve structures, machines, devices, systems, materials and processes.”
Cash Flow Engineering is the process of applying known mathematics and industry Knowledge to apply solutions that provide consistent, and predictable Cash flow in a scientific and proven methodology that combines both financial reporting and operational implementation. It’s result is to increase profit and reduce risk for construction companies.
Cash Flow Engineering has two very important parts:
1.) The knowledge and information of key areas of your finances that impact profits
2.) The implementation of real automated AND human processes that map the operations for profit.
What’s missed in 90% of the businesses we work with is this integration – Automation with process. We all take blueprints seriously in the actual physical building of a home or large construction project, yet we consistently work with sloppy financial tools which drive the physical process.
The fact is nothing good happens in business (or life) without it being a Intelligent thought first. Nothing in this room arrived without the fuel of Intelligence, and the implementation of that thought process. The table you’re sitting at … was engineered with the right information and started with intelligence. The lighting, the ceiling and the roof… even the door you walked through, all started as an idea, and was engineered with good information, the right tools and experience… for profit.
So why don’t we “engineer” our profit? Profit like anything physical is just the manifestation of good thought process and knowledge into a “real” thing by using the best tools available.
Anyone feel profit isn’t real? Just like everything you are surrounded by in this room, profit is just as real and can be engineered. We call it Cash Flow engineering.
Components of Cash Flow Engineering
- Intelligence. You need expertise
- Thought Process.. you need experience
- Tools… you need automation and process
- Implementation… you need systems
- Reporting… you need accurate numbers
What we deliver to clients is the automated system, and much of the broader Intelligence needed to insure profits, mitigate risk, and sleep much better at night, through a predictable and consistent Cash FLow system we call Cash Flow engineering.
Detailed thought process……How many of you know…
where to get a building permit?
What the average wage is for a framer
What the average square foot cost is for the projects you build?
How many of you know:
The industry average cost of marketing? Are you spending more or less than the competition?
What the industry and local average Net profit is for a company like yours.
What is your critical mass quarterly to survive?
WHat percent of your gross your overhead needs to be to make the right amount of profit?
What’s your monthly break even amount?
What is your net profit on projects that cash flow after your break even amount
How to calculate a 18% margin on job that costs 100K?
What margins you need on all jobs to make a reasonable profit.
What is your cash flow on every job, every week
This is the larger Intelligence that is nearly impossible to have unless you have worked with 100’s of home builders and contractors, and managed billions of dollars in Cash Flow over the years.
The most misunderstood value a company brings to the market… is Intelligence, experience and the tools to build with.
Any of you ever witnessed an idiot as a competitor? Notice how quickly they disappear?
In Cash FLow engineering… you view every dollar spent as an investment. And if you can pay out a dollar… that returns $1.25 that year, you’d be throwing every dollar you could find at it.
In fact… your labor is an investment and must return a percentage.
Your marketing is an investment that must produce a return on the dollars spent.
Your Financial management should be the same. You should EXPECT a profit on that cost.
That’s what cash flow engineering provides… a profit on the financial management of your company. Our average client, using cash flow engineering see’s a 2-3% increase in (NET?) profits.
That can be a 10% to 30% increase !
So for the next 70 minutes or so I’d ask you to change your thought process from this old fashion view of profit
(Pyramid with profit on top)
Pyramid with Profit as foundation
Profit isn’t a result, its a plan
What you will learn today:
Importance of Cash Flow
What Is Cash Flow Engineering
How to implement it in the 4 areas of operations
But first lets talk briefly about Cash Flow in general…
Point One: Every large Successful company has a CFO who has one main responsibility, to insure consistent and Predictable cash flow. Some of you may as well, but in many cases its just not economically feasible to pay a CFO 200K a year. Cash flow engineering gives you this function, at tiny percentage of the cost of a CFO. And… it doesn’t need a staff, or an office , or an expense account!
So, if you all would allow me to, I’d like to apply to be your CFO or CFO assistant for the next 70 minutes, and tell you how I (or your current CFO) can and will deliver Predictable and Consistent Cash Flow and turn your accounting and bookkeeping into a partner that makes you more money.
everybody okay with that? Thank you!
As your CFO…Let’s talk about…
a Commonality of successful Construction Firms.
In our experience, THey all have trusted advisors in key disciplines. The owners or senior managers play this role on operations, and sometimes sales and marketing. But you see a void many times in the finance area. Remember… 33% of your net profit is a result of each area. And that experience is a key component of success in any area.
Ask The group – What are the key disciplines of your business?
( write on board) Operations, Sales/marketing/ Financial Management (any others)
Now you can define if each area is doing a good job by asking these questions:
Are jobs completed on time.
Are customers Happy
any other questions the group can think of ? Write them down
Sales and MArketing:
You have a steady flow of projects and leads
You close an acceptable rate
The leads you get are for the right type of customer
You always know how much money you have in the bank
Youre always collecting money BEFORE work is performed
You never worry about making a payroll
You know how much is going out and how much is coming in very week, without guessing
You make profit on every job, and you don’t have surprises come up that bring down your profit
Now please take a look at your first page of our handout and take a few minutes to answer the questions on the what’s working and what’s not page.
(give them 2 or 3 minutes to do this)
Then… okay, now quickly
Rate yourself and your company in each area 1-10
I want to give you a formula you’ll be using in a second to figure out how much money you can add to your bottom line by using cash flow engineering as your CFO or to assist your CFO.
In construction your net profits will basically reflect your
expertise in the three disciplines…
So lets take a look at your answers… and figure each discipline will be contributing 33% of your profits., if your answer in that area is at least an 8.
On the next page you can see a worksheet that you fill out.
Assume 100K in profits or add your own numbers from last year, or projected for this year.
I’ll use 100K because its easy…
The reality is any score below a 5 is probably costing you ALL of that area’s contribution to profit. Any score between 5-7 is probably costing you 50% of that area’s contribution.
How many had anything below an 8 in operations?
In Sales and MArketing?
On your worksheet… take your gross profit and now subtract either 16% or 33% of the dollars as lost profit due to underperformance in that area.
at 100K thats 16,000 or $33,000. And I hope most of you are doing much more than that!
Another way to look at this lost opportunity is to figure out how much additional gross revenue you will need to make those same dollars. So, If your lost opportunity in Finance is $35000, You will need to sale build and complete an extra $350,000. in projects to make up for that.
And by the way, if you’re doing 1,200,000 a year…. your net had better be 100K, or something is very very wrong.
The entire point of this is for all of us to recognize that each area of your business has a profit opportunity, IF it’s run well. And in construction companies, Finance is generally the area that the managers have the least amount of experience or knowledge in, and especially when it comes to how to make money using Finance.
Thats why I’ve spent the last 7 years figuring out the CASH FLow Engineering system for you…
Cash Flow Engineering is this:
1.) The knowledge and information of key areas of your finances that impact profit…
2.) The implementation of real automated AND human processes that map the operations for profit.
It works to engineer the 4 major components of operations that makes up your profits
1 Bids or estimates….
2 Job Cost Tracking
3 Progress tracking and reporting
4. Change orders or exceptions
Cash Flow Engineering is a process that combines operational systems with financial reporting and awareness, which insures a profit on every Job.
Now, as your CFO I’d like to show you how each component should be engineered to assure profit
Lets look at
Estimating and Pricing:
The most common mistakes I’ve seen in Estimating are:
Each mistake causes a builder to start losing money… from the VERY beginning!
So.. we engineer your estimating process to automatically safeguard your project against these problems! Doing this with automated tools is the best system. It removes a bunch of mistakes, and saves a ton of time.
Pricing slides here Jeff insert your slides here on pricing and estimating. Remeber.. its about the process…
Lets look at the Principles of Cash Flow Engineered Pricing for estimates and why they will make you money.
( Explain and then show screen shots of our CashFLO software to use as an example
At the end ask… Can you see how just this can make a business more money? Right! And thats what Cashflow engineering does for the estimating process…
It is the result of good information… good tools and experience
( Margin exercise here?) Jeff insert one slide on Margins. ONE!
I can’t move on today without giving you one exercise that might change your business for the better forever if you fail. So don’t worry about a grade here.
Write down three costs:
Write down how you would calculate a margin of 30% on each one, and what that number + 30% margin is.
Ask for answers.
some will be right… some will be wrong.
Explain BRIEFLY how a margin is calculated…. and have the margin slide up.
Ask… can you see how important this is in your pricing and estimating.
Pricing and estimating is the foundation of profit, and doing it with the right tools, the correct information and intelligently is what cash flow engineering is about. I built a software that does this for you, or you can do it yourself. In our business, we do all the backend work, so your job is to just use the tool.
Lets look at the second component: Job Cost tracking!
As your CFO… I see Job cost tracking as taking your final estimate, and tracking your performance against that profit goal. It’s not something you should review at the end of a job as a report card… with cash flow engineering you see the profit of every job every week, and you will know if you are on track, or need to make changes. And you will know in 5 minutes per job or less.
Question: How many of know exactly where each project you build stands from a cash flow basis every week. Are you making money, or losing money… right then?
In cash flow engineering you should never be cash negative … never.
Here’s a little example of the intelligence we use in cash flow engineering
(Screen shot of dash board)
Go through ONE job dashboard. Just the dash board. Use one that is not doing well.
HOw do we do this?
and an operational relationship… you seeing it and acting on it as a process.
Lets talk briefly about the principles we use in Job costing…
Jeff use your slide(s) here. No more than two. no more than 5 minutes.
So can you see how a well engineered job costing system can make you money? Knowing what’s happening at any step in a project?
Question….Tell me how you could use this information?
BUT as we all know they are challenges that come up during any job… unless anyone here never has a change order or a scheduling problem on any projects? Anyone?
Lets look at how Cash Flow engineering automates and integrates a process to handle these opportunities using intelligent thought process, automation and the a system.
But first… would someone share how they handle change orders, or exceptions now? In other words— how do you know a cost that was on the estimated went over the plan? Say your electrical cost was based on 10K, but the bill is 13K. How and when would you know, and what would you do?
Get answers… and brief discussion
Great… As your CFO, let me walk you through a Cash Flow engineered system, that is automated and allows us , if you implement it, to never lose a penny of profit using job cost tracking.
Jeff insert Two Slides here on Job Costing, and a screenshot of
our Job Costing in Cash Flow.
Walk them through it 3- 5 minutes
( Job Tracking will go along the same lines…. starting with a question to the group and then into the cash flow engineering slides of your choice as related to scheduling)
A summary of the importance of Intelligence, thought process and system are to profit
A example of a client using cash flow…. success!
THanks for allowing me to be your CFO this morning. I hope it’s been valuable… and I want to let you know how we can actually work together if you like.
We have three ways-
The full day CFO financial check up. I’ll will spend a day doing…..
with you… at the end of that day you’ll have an actionable plan to make more money. I only have one spot a week, so you need to speak to us today to schedule it.
We also have a quick one hour review… a get to know you better session where we ( details)
And, if you’re ready, we can discuss a performance based accounting/bookkeeping and cash flow engineering service. And yes, we can do everything for you including the Intelligence, tools, and implementation. BUT only if you are ready to commit to higher profits. Talk to us today to schedule a meeting.