Cash Flow to Improve Quality Of Life

Small business owners always have a lot on their plate, which causes stress away from the office. The following case study illustrates how Cogent Analytics was able to increase the quality of life for one business owner by helping them understand and manage cash flow more effectively.

CLIENT INFORMATION

The client is in the construction industry. The service provided by the client is lot clearing & grading, footings, foundations, flatwork, and landscape design and build. The current owner managed the business for 15 years before purchasing the business five years ago. This company utilizes both W2 employees and subcontractors to complete the work. The company’s annual sales are about $4,000,000 and have remained flat for the past several years. In 2018 and 2019, net profit was not to expectation, and the client engaged with Cogent Analytics to help manage cash flow, become more profitable, and have a better quality of life.

STATUS / SITUATION / CHALLENGES

The challenges this client faced are the following:

• Cash Flow Management-Unsure what the cash position is, so decisions are being made without financial data.
• Job Costing-Absorption (overhead) is not taken into account when bidding work and invoicing. This was producing a net profit that was undesirable.
• Lack of training to use income statements and balance sheets as a tool to manage the business-Client was not trained on how to use the two reports to understand what was happening within the business.
• Overtime doubled from 2018 to 2019-Had no idea because they were not looking at payroll reports
• Equipment and vehicle repair increased from 2018 to 2019-Was not paying attention to the income statement and balance sheet to recognize YTD expense and loan balances.
• The client has no documentation on the workflow for the business-Everything is in his head
• Quality of life-Always worrying about the unknown

SOLUTIONS

• Cash Flow Management tool was required to understand the cash flow position each week. This allows the client to have a weekly financial meeting that focuses on A/R and A/P and the weekly cash position of the company. The client can see the effect of cash flow when they have an unplanned spend, or A/R is delayed.
• A job costing tool was created to utilize for each bid and invoice. The job costing tool accounted for all expenses for each job type, whether material or labor, all equipment expenses incurred to complete the job, and finally, absorption (overhead). This allows the client to understand which services need to be examined for changes and elimination over the next two quarters.
• Training was provided on how to read and understand the income statement and balance sheet. During training, several scenarios were provided, and discussions were had on how it impacted the income statement. This provided an opportunity to see how operational issues reflected the bottom line and cash flow.
• The overtime doubled from 2018-2019 while sales remained flat. We ran payroll reports back to 2016 through 2019 and determined that overtime increased for no reason other than lack of management. Two things were immediately changed. We created a supervisor position whose primary function was to visit each job site by the end of the day. During the visit, a checklist is used to understand the current status of the job and, most importantly, have the crew end the day before overtime begins. TSheets was implemented to track time at job sites, help with scheduling and GPS.
• Equipment and vehicle maintenance doubled from 2018-2019. It went from $83,000 to $167,000. It was determined that the cause was from a lack of preventive maintenance program and having no benchmark for the end of life. We implemented a comprehensive preventive maintenance program and assigned a worker to be responsible for managing the program. We also had discussions and created a benchmark for the end of life. We met with the vehicle and equipment suppliers to learn of leasing options that included preventive maintenance and repairs to be included for the term of the lease.
• The owner had every work process in his head. The employees were all experts at their function but had no idea of anything else in the company. After much discussion, the client agreed that standard operating procedures need to be created. We created SOP’s for every job type and every critical administrative function.
• Quality of life was not to the client’s expectations. The client spent many sleepless nights and 12-hour workdays because of the above mentioned. By creating SOP’s, creating a supervisor position, installing a cash management system, and having a preventive maintenance program, the client saw that the quality of life issues could be addressed.

RESULTS

• The cash management system proved to help understand precisely the cash position of the company. This is a tool that the client never had and, once trained and followed, proved to be a significant asset. The client is now driving the business and was able to begin repaying the line of credit every week and set up weekly savings for an emergency fund. We also trained the administrative staff to keep the Cash Management System up to date. Now the client has weekly financial meetings and discussed A/R, A/P, and weekly cash position. Everyone contributes to the conversation, and together decisions are made for collections and payables. This has created a different awareness throughout the company, and everyone is working hard to protect the cash position. 
• Now that the client understands the income statement and balance sheet, they can review in the weekly financial meeting and begin to see when the business needs attention in a particular area and manage cash flow better. 
• We agreed to immediately cut overtime by 50% ($32,000) to resemble the years 2016-2018. This was accomplished by creating the supervisor position and installing TSheets. TSheets is a mobile time tracking, scheduling, and GPS application that is installed on each crew member’s smartphone. Between these two changes, overtime is quickly moving to the target amount. 
• Fleet maintenance was severely lacking, and there was no policy on when to replace a vehicle or piece of equipment. We reached out to the equipment vendor and had the preventive maintenance schedule for each type of material delivered and created a plan for maintenance. We also decided to learn about equipment leases that included repairs and preventive maintenance for the life of the lease. It cost an additional $6,000 to add these items to each piece of equipment. This was far cheaper than paying for the repairs over a 3-4-year period. The client decided to replace the piece of equipment that met the end of life criteria. There will be no other repairs and maintenance fees associated with that piece of equipment, and when others reach the end of life, decisions can be made correctly. 
• Standard Operating Procedures were created, and employees were trained on the ones that pertained to them. Immediately the team had greater insight into the process and how their work impacted the rest of the group. They were now able to forecast when issues could arise, based on any number of factors, and take action to make changes in the workflow to prevent the problem. This has improved the quality of life for the client because they are not required to solve every issue that comes up on job sites daily. The team interacts better with each other and has a new sense of purpose within the organization. 
• The client measures quality of life by how much or little sleep he gets at night. The client stated that the quality of life improved within two weeks of implementing changes and continues to grow. After the 3rd week, the client indicated that he got the most uninterrupted sleep (in the previous night) than in the past three years.