An Executive’s Guide to Management, Money & Millennials for the Construction Industry
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Transcript of An Executive’s Guide to Management, Money & Millennials for the Construction Industry
An Executive’s Guide to Management, Money & Millennials for the Construction Industry
Risk Management of Workingin New MarketsPresentation by Susan L. McGreevyStinson Leonard Street LLP
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Doing Business Away From Home• More businesses are spreading out and
doing business in new locations than ever.
• This is a natural part of “globalization” and has been accelerated by technology. Lots of industries are doing it, and doing it successfully.
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Why Construction and Development Are Different• The world of construction and
development has some characteristics that make this more problematic than other industries.
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Why Construction and Development Are Different• It deals with real property located in a
specific country, state, county and city. As a result, mechanic’s lien laws are different.
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Why Construction and Development Are Different• It usually disturbs that property, and
that disturbance usually affects and is affected by the specific soil characteristics, which vary greatly all over the country.
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Why Construction and Development Are Different
• It usually involves workers who may be new to the employer from out of town.
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Why Construction and Development Are Different
• Some of those workers may be members of unions, and the local custom about which trade can perform which work may be different.
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Why Construction and Development Are Different
• In some parts of the country, many of those workers may not be able to communicate well in English.
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Why Construction and Development Are Different
• It usually involves the use of chemicals, solvents, fuels and other hazardous materials that may be regulated – more or less – by the state of the project.
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Why Construction and Development Are Different• It is also typical in construction for
some amount of money earned by a contractor to be held back as retainage, and many states now have laws regulating how much retainage can be held, and when it has to be released.
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Why Construction and Development Are Different
• It is also typical in construction for contractor to not pay their subs and suppliers until they are first paid. Many states now have laws regulating when they have to be paid. And the penalties can be steep (even criminal).
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Why Construction and Development Are Different
• If public funds are involved, it is typical that the contractors and designers will have to meet goals to employ targeted firms and workers – minorities, women, veterans, inner city residents. And this varies all over the place.
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Why Construction and Development Are Different
• If public funds are involved, there will often be special rules for how disputes are pursued, including over award of contracts.
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Why Construction andDevelopment Are Different
Every one of the characteristics I have just listed is regulated.And more!Most of them are regulated differently depending on the particular jurisdiction.
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Why Construction and Development Are Different
• Aside from all these issues of regulation, there is the physical reality that development and construction are tied to a place, and the harder that place is for you to get to, the less knowledge and control you will have over what happens there.
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Question for Audience
How often do you work out of your home base?1. Not yet, but thinking about it2. Rarely – we are very selective3. Occasionally – when opportunity arises4. Frequently – we consistently work in
multiple jurisdictions
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What’s the Worst That Can Happen?Example #1:• Kansas manufacturer typically sells
equipment to be installed in facilities of its customers, average $3.5-4.5 million. Business is down. Takes on a project to design, build and install its equipment in a new factory in Minnesota, for $15,000,000. Many problems getting final close-out, due to:
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What’s the Worst That Can Happen?Example #1:• There were many issues integrating its
equipment with power, mechanical hook-ups, etc., with the local subcontractors.
• And when these issues arose, there were problems getting these subs to show up.
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What’s the Worst That Can Happen?Example #1:• Often, equipment shut down occur
when company's key employees weren’t in Minnesota – having worked 4 10-hour days and left to go home.
• This resulted in many irate emails from the owner and demands for managers to drive up on weekends.
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What’s the Worst That Can Happen?Example #1:• Owner has refused to pay the last $1.5 million
(retainage) because project was late, and the owner says it was prevented from producing products and making money.
• Manufacturer wants to file a lien to force the owner to pay, but discovers that state law required it to file a notice of commencement when it started work, which didn’t happen.
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What Went Wrong?
Example #1:• Manufacturer took work far away from
its home town. This meant that management was not seeing the work on a daily basis, and had to rely on the employees in charge of the job for status reports.
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What Went Wrong?
Example #1:• Manufacturer hired subcontractors it
hadn’t worked with before and didn’t know. These particular ones had no loyalty to manufacturer, and let him down in responsiveness and quality of work.
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What Went Wrong?
Example #1:• Manufacturer sent key employees from
its home office to oversee the job. These people were living in hotel rooms, away from their families. When issues came up at home, they were often not at the jobsite. They tended to leave early to come home and return late.
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What Went Wrong?
Example #1:• Manufacturer didn’t check out the state
laws in advance.So, it didn’t preserve its lien rights.
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What’s the Worst That Can Happen?Example #2:• Subcontractor from Kansas takes on
structural steel subcontract in Oklahoma. Hires the only union steel erector in area, allows erector to represent sub at progress meetings.
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What’s the Worst That Can Happen?Example #2:• Sub didn’t learn until later that erector
agreed to schedule changes that sub, as fabricator, couldn’t meet.
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What’s the Worst That Can Happen?Example #2:• Sub finds out from General Contractor
that erector has refused to perform changes unless he gets paid in advance for them, which is not what the sub’s contract says.
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What’s the Worst That Can Happen?Example #2:• Erector tells sub that if sub doesn’t like
it, he can find another erector. (there are no other union erectors around).
• Sub has no choice but to do what erector wants.
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What Went Wrong?
Example #2:• Sub took work in an area where he
didn’t know the erectors, and took his chances on an unknown.
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What Went Wrong?
Example #2:• Sub took work in an area where he
wasn’t able to attend meetings to represent himself, and instead empowered someone else to make decisions that were binding on him.
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What Went Wrong?
Example #2:• Sub took work in an area where he
wasn’t able to visit the job and see for himself the progress of the work.
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What’s the Worst That Can Happen?Example #3:
• A contractor from Minnesota takes on a number of projects in Illinois. It doesn't register as foreign corporation.
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What’s the Worst That Can Happen?Example #3:• Some years later, the contractor needs
to sue an owner for non-payment. • Discovers he can’t sue until he
registers as a foreign corporation and pays all back franchise fees. By then, the statute of limitations has run.
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What Went Wrong?
Example #3:
• Contractor forgot to do his homework, and state didn’t catch him either. Contractor ended up having to pay bills that he should have been able to pass on to the owner.
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What’s the Worst That Can Happen?Example #4:
• Kansas company delivers steel to project in Utah. Doesn't get paid. Wants to file a lien.– Is told that he can’t file a lien.
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What Went Wrong?
Example #4:
• Company finds out that Utah requires anyone who wants to have lien rights to file a notice via a website, so that the owner can be aware that he is on the job. Company hadn’t done that, so no lien rights.
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What’s the Worst That Can Happen?Example #5:
• Missouri HVAC sub takes work in Iowa for a General Contractor. Owner runs out of money. Sub files lien.– Finds that he will get nothing.
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What Went Wrong?
Example #5:
• HVAC sub discovers that in Iowa, the first to file a lien gets the first proceeds of a lien foreclosure. All of the money went to firms who filed before he did.
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What’s the Common Thread Here?
What all of these examples illustrate are just some of the things you have to think about in making the decision to take work far away from your home base. Things like:
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What Could Be Different in a New Location?The Labor market• How strong are unions in the new
town? • What work is claimed by which unions? • Will the local allow you to bring your
own union employees in?
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What Could Be Different in a New Location?Subcontractor/supplier market• How do you gauge the reputations of
subs you get prices from? • Will you get their full attention, or
come in last in the event they overbooked?
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What Could Be Different in a New Location?
How do you monitor project?
You aren't going to be driving by every day – video cam? Photos? Trusted employee?
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What Could Be Different in a New Location?Staffing• Are you going to have your own
employees on site all the time? • Who is your back up if one of your
people can't get there? • If you rely on a local sub or locally
hired employee, what is their loyalty to you, how well do you know them?
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What Could Be Different in a New Location?Local Laws – Taxes• What are state and local taxes? • Who do you register with and how do
you pay them? • You have to include all of these costs in
your bid, so this has to be done up front.
What Could Be Different in a New Location? Local Laws – Taxes• Allocation and apportionment
factors• Uniform Division of Income for
Tax Purposes Act (UDITPA)• Other multistate compact
– Industry specific apportionment formulas
– Specific exclusion of income items
– Specific exclusion of cost items
• Credits and tax incentives• Income tax – C corporation• Income tax – S corporation• Composite returns for S
– allowed or not?
• Estimated tax for s– Required or not?
• Withholding on non-resident S shareholders?
• Payment on income or distributions
• S corporation treatment• C corporation treatment
– Recognize Federal S election
– State S election required? • Income tax – Partnerships, LLC• Income tax - Individual• State construction related
credits
4650
What Could Be Different in a New Location? Local Laws – Taxes• Franchise tax
– Taxable basis• State licenses – GC & Specialty
– Reciprocity states– Equity requirement– Financial statement requirements
• Local licenses• Per capita share tax /Equity tax, • State sales and use tax
– Grandfathering of rate changes– Government provided materials –
sales tax– Taxable services
• Local sales and use tax• Fuel tax• Property tax
– Personal property– Real property
• Local sales and use tax• Intangibles tax• Employment taxes• Business Privilege taxes• Impact Fees
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What Could Be Different in a New Location?Local Laws – MBE/WBE Certification
• If you have goals to achieve in the locale, who does the certifying? What are their criteria?
• How can you verify that firms you are considering are certified?
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What Could Be Different in a New Location?Local Laws – Prevailing Wages• What kind of work falls within the
requirement? • How do you register and get the right
rates?• Who audits?
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What Could Be Different in a New Location?Local Laws – Public Projects
• All states have their own procurement codes, with their own procedures for claims. Some have sovereign immunity to suit, short timelines, etc.
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What Could Be Different in a New Location?Local Laws – Lien Laws • Nothing varies as much from state to state. • May be required to give pre-construction
notice, make filings etc. • May require pre-filing notice (such as
Missouri)• May only allow General Contractors, or
1st/2nd tier subs, may allow everyone• May allow designers, may not.
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What Could Be Different in a New Location?Local Laws – Prompt Pay Laws
• Many states now have these, and the penalty for non-compliance can be steep – in Kansas, a successful contractor, sub or supplier can get 18% interest and attorney’s fees.
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What Could Be Different in a New Location?Local Laws – Retainage Laws
• As with the Prompt Pay laws, this is a new concept and not all states have them, but if the state has one (such as Missouri), it can be complicated to know how to keep and release retainage.
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What Could Be Different in a New Location?Local Laws – Indemnification Laws
• More states have passed laws (or the courts have ruled) that restrict what language can be put in a contract to require one side to pay for damages caused by the other side.
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What Could Be Different in a New Location?Local Laws – Choice of Law, Location of Lawsuits
• Some states will not allow you to put a clause in a construction contract that requires lawsuits to be brought in other states.
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What Could Be Different in a New Location?Local Laws – Licensing• Does the company become licensed or individuals? • Do those individuals then have to be on the site at
all times?• In Arkansas (and many other states) it is a
misdemeanor to practice construction without a license. Contractor is required to submit financial statements with its application. Are these available to the public?
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What Could Be Different in a New Location?Local Laws – Permitting
• Who has to pull permits? • Are there reclamation or completion
bonds required by local authorities, and who has to provide them?
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What Could Be Different in a New Location?Local Laws – Tax-Increment Financing• If public funds or tax relief is involved,
what strings are attached?– Does this mean that you must pay
prevailing wages?– Does this mean that you must have
MBE/WBE participation?
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What Could Be Different in a New Location?
Many of these issues vary not just from state to state, but from county to county and city to city.
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What Should You Do?
Check out the laws in a community before taking on the work.• If it is public work, the agency should be able to give
you access to the regulations in advance.• If it is private work, often a state’s websites will give
information about what laws you have to comply with.• There are books and websites with information too
(although they frequently are not up-to-date, and leave a lot out).
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What Should You Do?
• Think through potential issues, and have a game plan for them.– How will you pick people who will run a
project for you far away?– Can you put a contingency in your number
for the unknowns?
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What Should You Do?
• Talk to people who regularly work there.
– They may share information about subs, suppliers, local conditions, etc.
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What Should You Do?
• Talk to your surety.
• Talk to you banker.– These folks may care a lot about you
taking on more risk, and will want to know that you have considered the move carefully.
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What Should You Do?
• Talk to your accountant.
• Talk to your lawyer.
• Talk to your insurer.– All of them can help you get in
compliance and be protected.
Questions?
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Read More About This TopicRead Susan McGreevy’s Building Profits article from the May/June 2016 edition of Building Profits magazine: “Doing Business Away from Home: Have You Done Your Homework?”
Read More About This Topic
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Susan McGreevy, PartnerKansas City construction attorney Susan McGreevy's practice consists primarily of advising construction companies, sureties, design professionals, and owners in their day-to-day business ventures. This includes the drafting and negotiation of all types of agreements, resolution of disputes, trying lawsuits and arbitrations, strategic and succession planning, and representing sureties in bond claims and litigation, as well as serving as an arbitrator and mediator.
[email protected] Walnut, Suite 2900 | Kansas City, MO 64106
A Financial Toolbox for Today’s CFOs and CEOs
Financial Toolbox
Today’s CFOs & CEOsmust be
Renaissance men or women
as they must always be evolving, learning, and
forward thinking
CBIZ & MHM
CFOs & CEO’s: Cannot be inhibited by organizational charts Must work across inter- and intra-organizational boundaries Required to inform, discipline, and motivate managers,
employers, customers, suppliers, and regulators Maintain technical knowledge and tools in their business
toolbox that can be take out and used at any time
How these roles will evolve in the future is uncertain, but they are
more likely to broaden than to shrink
Best when work as a Team
Financial Toolbox
Cash flow & Working capital management
Financial analysis and benchmarking
Personnel retention strategies
Prepare for the future - Technology
Fill it UP
Financial Toolbox
Financial Toolbox - Cash Flow & Working Capital
Management
Working capital management: designed to monitor and utilize the two components of
working capital: current assets current liabilities
ensures the most financially efficient operation of the company
Primary purpose – To maintain sufficient cash flow to meet its short-term operating costs and short-term debt obligations
CashIs
King
Financial Toolbox - Cash Flow & Working Capital
Management
Cash Is Notonly King,
It is Critical!
Financial Toolbox - Cash Flow & Working Capital
Management
More Contractors go Bankrupt
due toCash Flow
than Profitability!!!
Financial Toolbox - Cash Flow & Working Capital
Management
Financial Toolbox - Cash Flow & Working Capital
Management
Companies that are focused only on external financing may be overlooking a hidden source of cash - their own balance sheet!
Maintain competitiveness Fuel growth strategies External financing – challenges & expensive
Cash is Critical:
How much Cash is trapped in your balance
sheet?
Financial Toolbox - Cash Flow & Working Capital
Management
Financial Toolbox - Cash Flow & Working Capital
Management
Cash
Accounts payable / Job
costs
Unbilled jobs in progress
(wip)
Accounts receivable
The Cash Flow Cycle:
Cash Flow equals cash receipts minus cash payments over a given period of time
Working Capital
Cash
Accounts Payable
Inventory / WIP
Accounts Receivable
Make your working capital work for you to increase
your cash flow by optimizing :
accounts payable
work in progress
accounts receivable
Financial Toolbox - Cash Flow & Working Capital
Management
From back officeTo center stage
Financial Toolbox - Cash Flow & Working Capital
Management
Optimizing Accounts Payable:
Activities to Optimize Accounts Payable: Supplier & Subcontractor selection and approval process Negotiate favorable terms Contract review process / schedule of values
Committed costs in system by vendor/contract Procurement process
Issue P.O.’s and track in system against committed costs Invoice processing
Define how to handle inaccurate vendor invoices Payment process
Select method of payment – minimize bank fees Pay with credit card when possible Be wary of contractor discounts for prompt payment Utilize pay when paid provisions, when allowed Hold retention, if appropriate
Financial Toolbox - Cash Flow & Working Capital
Management
TheWork in Progress balancing act
Financial Toolbox - Cash Flow & Working Capital
Management
Optimizing Work in Progress:
Financial Toolbox - Cash Flow & Working Capital
Management
Use Schedule of Values to Optimize Work in Progress: Identify phases of work to break out separately for
billing categories No lump sum billings Mobilization, submittals, detailing, etc.
Place as much costs in early phases of project in order to front load the values
Record job costs to appropriate phases Provides an easy format to bill against Provides a format for which project owner / GC can
verify progress
Financial Toolbox - Cash Flow & Working Capital
Management
Effective Schedule of Value preparation is the single largest impact a Project Manager can have on cash flow
Goal should be to get paid for overhead/profit as quickly as possible
It is better to receive than to lend
Financial Toolbox - Cash Flow & Working Capital
Management
Optimizing Accounts Receivable:
Activities to Optimize Accounts Receivable: Customer credit approval
Commit to approving or rejecting credit applications Billing process
Timely submission - through end of billing period Prepare from schedule of values Review billing with client / owner/ owner’s rep
Collection process Review aging reports regularly Include payment terms in contracts Most important process or you become the lender!
Financial Toolbox - Cash Flow & Working Capital
Management
Collections are the PM’s responsibility, not accounting!
Financial Toolbox - Cash Flow & Working Capital
Management
Collection of receivables are usually held up due to: Billings require revisions (disputed POC) No lien releases Lack of documentation Late bills Damage to owner or other
subcontractor Insurance/bonding requirements Evidence work won’t finish by contract
completion date and retention won’t cover losses to be incurred
Financial Toolbox - Cash Flow & Working Capital
Management
Collection Strategies: Appoint an internal “bird dog” Include DSO as performance metric for Project
Managers Charge PM’s interest on negative cash position Reduce PM’s bonus by outstanding receivables Set alarm in AR system to notify management
Determine if work should be slowed or halted Determine when to file lien Determine when to file against payment bond
Financial Toolbox - Cash Flow & Working Capital
Management
Recovery of Past Due Receivables
Financial Toolbox - Cash Flow & Working Capital
Management
Days Past Due Percent Recovered
30 days 97%
90 Days 90%
120 Days 80%
180 Days 67%
1 Years 45%
2 Years 23%
3 Years 12%
Remember: Old Receivables just get Older!!!!
CashIs
King
Financial Toolbox - Cash Flow & Working Capital
Management
Cash Flow Tools: Cash flow statement Daily / Weekly Cash Report
Snapshot of cash position Expected cash inflows / outflows Highlights projected cash shortfalls – increase
collections Highlights where cash is being used
Cash flow projections (along with the budgets) Cash flow projection by Contract / Job
Financial Toolbox - Cash Flow & Working Capital
Management
Financial Toolbox - Cash Flow & Working Capital Management
Financial Toolbox - Cash Flow & Working Capital
Management
On Your Way to Obtaining Cash Fitness!
Financial analysis
Personnel retention strategies
Prepare for the future - Technology
Financial Toolbox
Cash flow and Working Capital
Management
Historically, CFOs have relied upon traditional financial statements to guide their decision-making
Today, the prevalence of more sophisticated accounting systems and the demand for more information more quickly has given rise to the need for different kinds of reporting
Financial Toolbox - Financial Analysis Tools
Daily Cash Reports Flash Reports Projections Fluctuation Analysis Benchmarking – Ratio
Analysis
Financial Toolbox - Financial Analysis Tools
Financial Tools:
A financial dashboard – one page report Snapshot of key data – financial & operational Three sections:
Liquidity Productivity Profitability
Not a mini-P&L
Financial Toolbox - Financial Analysis Tools
Financial Tools – Flash Reports:
Prepare along with budget Defines the expectations of a budget Dynamic and adopt to changing conditions Updated with actual data – changed with better info Prepare projected balance sheet – key tool for
lenders
Financial Toolbox - Financial Analysis Tools
Financial Tools – Projections:
Changes in IS and BS expressed in $$ and % of sales or total assets
Changes over multiple year period Identifies “slippage” or small changes
Financial Toolbox - Financial Analysis Tools
Financial Tools – Fluctation (Flux) Analysis
Example: 2% increase (% of sales) in
COGS equipment rental over a 4 year period
$50 mm Company - $1 million in slippage
Continuous process of measuring products, services, and practices against standards set by industry leaders
Determines what and where improvements are called for
Analyzes how other organizations achieve high performance levels
Use this information to improve performance
Financial Toolbox - Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
In the current market, your Company’s financial health will be examined more than ever…
Bankers Vendors Govt Agencies
Sureties CustomersWith so many eyes on your company’s financials, it becomes increasingly important to know how you stack up against the competition.
Financial Toolbox - Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
Four broad ratio categories:
• Liquidity
• Profitability
• Leverage
• Efficiency
Financial Toolbox - Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
129365644_1.pptx
Ratio Formula InterpretationCurrent Ratio – the extent current assets are available to satisfy current liabilities
Current Assets ÷
Current Liabilities
Generally, 1.0 is a minimum current ratio , which indicates that current assets at least equal current liabilities
Quick Ratio – the liquid assets that are available to satisfy current liabilities
Current Assets less Inventory and Prepaid Expenses
÷Current Liabilities
A quick ratio of 1.0 is generally considered a liquid position
Working Capital Turnover Ratio – the amount of revenue supported by each $1 of net working capital
Revenue÷
Current Assets minus Current Liabilities
A ratio exceeding 30.0 may indicate a need for increased working capital to support future revenue
Liquidity - Ability to meet short-term financial obligations on time
Financial Toolbox - Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
129365644_1.pptx
Ratio Formula InterpretationReturn on Assets Ratio – the profits generated by the assets
Net Earnings before Taxes÷
Total Assets
A higher ratio reflects a more effective use of Company assets
Return on Equity Ratio – the profit generated by the net assets, which reflects stockholders’ return on investment
Net Earnings before Taxes ÷
Total Net Worth
A very high ratio may indicate an undercapitalized situation or, conversely, a very profitable company
Time Interest Earned Ratio– a Company’s ability to pay interest expense from operations
Net Earnings before Tax plus Interest Expense
÷Interest Expense
A low ratio may indicate an over-leveraged situation and a need for more permanent equity
Profitability - A Company’s ability to generate earningsFinancial Tools – Benchmarking / Ratio Analysis
Financial Toolbox - Financial Analysis Tools
129365644_1.pptx
Ratio Formula InterpretationDebt to Equity Ratio – the relationship between creditors and owners
Total Liabilities÷
Total Net Worth
Generally, a ratio of 3.0 or lower is considered acceptable
Revenue to Equity Ratio – the level of revenue supported by each $1 of equity
Revenue÷
Total Net Worth
Generally, a ratio of 15.0 or less is considered acceptable
Fixed Asset to Net Worth – the extent an owner’s cash is frozen in the form of fixed assets
Net Fixed Assets÷
Total Net Worth
Generally, a ratio of 0.75 or higher is undesirable as a higher ratio may indicate a lack of funds for current operations
Leverage - A Company’s reliance on debt to finance operations
Financial Toolbox - Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
Create a financial benchmark worksheet Financial ratio to be measured Formula Interpretation Actual calculation – ratio results Compare to “best in class”
Financial Toolbox - Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
SIC NAICS____ • Industrial & 1541, 1542 236210, 236220
Nonresidential
• Heavy & Highway 1611, 1622, 237110 to 237990 1623, 1629
• Specialty Trades 1711-1799 238110 to 238990 Website: www.naics.com
Contractor Classifications
Financial Toolbox - Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
129365644_1.pptx
Identify Data Sources RMA (Risk Management Associates, formally Robert
Morris Associates) www.rmahq.org
PAS (Personnel Administrative Services) www.pas1.com
FMI (for customized benchmarking) www.fminet.com
Trade Associations Industry Focus Groups Sureties
Financial Toolbox - Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
129365644_1.pptx
www.financialbenchmarker.com
Financial Toolbox - Financial Analysis Tools
Best in Class – Definition Per CFMABest in class companies refer to the top 25% of all survey respondents, based upon a composite ranking of the following ratios:1. Return on Assets
2. Return on Equity3. Debt to Equity4. Fixed Asset to Net Worth5. Working Capital Turnover
Financial Toolbox - Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
129365644_1.pptx
Ratio Formula InterpretationBacklog to Equity – indicates relationship of signed or committed work to total stockholders’ equity
Backlog÷
Equity
Generally, a ratio of 20 or less is considered acceptable. A higher ratio may indicate the need for additional permanent equity
Underbillings to Equity – indicates the level of unbilled contract volume being financed by the stockholders.
Underbillings÷
Equity
Usually stated as a percentage; a ratio of 30% or less is considered acceptable
Backlog to Working Capital – the relationship between signed or committed work and working capital
Backlog÷
Working Capital
A higher ratio may indicate a need for an increase in permanent working capital
Days in Accounts Receivable – indicates the number of days to collect accounts receivable
Net Receivables x 360÷
Revenue
A lower ratio indicates a faster collection of receivables, i.e., more liquidity
Don’t Forget the Sureties – Efficiency Ratios:
Financial Toolbox - Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
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Other Potential Warning Indicators Warning!
Check numbers again!
• Cash to overbillings < 1 to 1• Average age of receivables > 60 days• Underbillings to equity > 20 %• Fixed assets to equity > 1 to 1• Average age of payables > 45 days• Debt to equity > 3 to 1• Revenue to working capital > 20 to 1• Interest bearing debt to equity > 80 %• Overhead to equity > 1 to 1• Job profit fade/slippage > 10%
Financial Toolbox - Financial Analysis Tools
Financial Tools – Benchmarking / Ratio Analysis
Key employee retention strategies
Prepare for the future - Technology
Financial Toolbox
Cash Flow & Working Capital
Management
Financial analysis tools
Financial Toolbox - Key Employee Retention Strategies
How many business owners or executives take an extended vacation – more than a month at a time?
Financial Toolbox - Key Employee Retention Strategies
How many sophisticated buyers will seriously consider acquiring a company that lacks a good management team?
Financial Toolbox - Key Employee Retention Strategies
No matter what language you speak the
answer is NONE
Aucun
Никто
Keiner
Ninguna
These scenarios highlight a Company’s need for Key Employees who:
Provide motivation to others
Provide management skills within their departments
Provide leadership to fellow employees
Would stay with the Company after the current owner has departed
Financial Toolbox - Key Employee Retention Strategies
Key Employees are often cited as one of the most significant value drivers within a successful Company: Help build profits
Help build up the value of the Company
May increase Company morale
May provide a challenging and dynamic work environment
Financial Toolbox - Key Employee Retention Strategies
Who are your Key Employees?
KEY Employees act and think more like the owner does
Basically, they behave like OWNERS!
Financial Toolbox - Key Employee Retention Strategies
CBIZ & MHM
Financial Toolbox - Key Employee Retention Strategies
Key Employees Are known within the industry Focus of recruiting efforts by competitors Want tangible recognition and appreciation
So, how does a Company encourage high-caliber talent to stay the course?
Most common response – Why don’t we just pay the Key Employees a higher salary?
Financial Toolbox - Key Employee Retention Strategies
Most common response – Not always the Best Response!
A higher salary: Does not stop competitors from offering
even higher pay or a better opportunity
Does not encourage a leadership mentality
Does not invoke loyalty
Financial Toolbox - Key Employee Retention Strategies
A better response – A properly designed Key Employee incentive/retention plan
Benefits: Encourages a leadership mentality and
loyalty Increases productivity Allows the plan participants to be hand-
picked Plans are subject to minimal IRS
intervention Carry no minimum or maximum
contribution mandates
For both the Company and the Key Employee, a well-designed Key Employee incentive/retention plan is a
Financial Toolbox - Key Employee Retention Strategies
Financial Toolbox - Key Employee Retention Strategies
A properly designed plan must include 4 variables:1. Substantial financial awards to Key Employees
2. Financial / performance benchmark attainment
3. Deferred benefit payout
4. Communication in writing
1. Substantial Financial Reward
Substantial to positively impact and motivate behavior
As much as one month’s salary and up to 25% (or higher) of the Key Employee’s base pay
Remember – this is an incentive / retention plan NOT a seasonal bonus paid to all employees
Financial Toolbox - Key Employee Retention Strategies
Financial Toolbox - Key Employee Retention Strategies
2. Financial / Performance Benchmark Attainment
Financial and/or performance benchmark that must be achieved in order to earn an award
Benchmarks: Easily identifiable Translate to an increase in bottom-line profit
Obligation to fund the award only exists when reach profitability targets
Financial Toolbox - Key Employee Retention Strategies
3. Deferred Benefit Payout
A portion of (if not all) of the annual reward must be deferred for future benefit payout – at least 50%
This where the retention feature is achieved
Payout age and/or years of participation can be individualized
Owner determines: Required years of
participation Vesting prior to payout
Financial Toolbox - Key Employee Retention Strategies
4. Communication
The plan must be communicated via a written plan summary for each chosen Key Employee
The Key Employee must understand:1. Motivation behind the offer2. Why they were selected to participant3. How the plan is going to operate4. What they might expect in projected benefits once
benchmarks are achieved
Types of Incentive / Retention plans
CASH OR EQUITY-BASED
Financial Toolbox - Key Employee Retention Strategies
Equity- Based (Stock) PlansPros: Provides opportunity for stock ownership Stock ties the Key Employee to Company Personal investment and commitment Incentive for increasing company value
Cons / Issues: Smallest of ownership carries “rights” of
ownership Willingness to bring new owner into
confidences Determination of proper timing Key Employee should be a proven commodity Stock repurchase agreement Determination of type of stock
Financial Toolbox - Key Employee Retention Strategies
Equity- Based (Stock) PlansTypes: Non-qualified stock bonus Restricted stock bonus plan Key Employee purchase
Financial Toolbox - Key Employee Retention Strategies
Equity- Based (Stock) Plans Non-qualified stock bonus
Financial Toolbox - Key Employee Retention Strategies
Key Employee receives stock at no cost
FMV of stock is determined and taxable to Key Employee as ordinary income – W2 income
Company receives a deduction
Equity- Based (Stock) Plans Restricted Stock Bonus Plan
Financial Toolbox - Key Employee Retention Strategies
Stock bonus awarded but no possession until: Vesting period Performance goal achieved
All basic rights of ownership at time of award
Election to be taxed when awarded – 83(b). Ordinary tax on value when received award Capital gains on any future increases in value
Equity- Based (Stock) Plans Key Employee Purchase
Financial Toolbox - Key Employee Retention Strategies
May bonus cash to allow purchase
If stock is purchased below FMV: Key Employee is taxed on difference Company receives offsetting deduction
Cash Based Incentive PlansPros: Most prevalent in privately owned
companies No transfer of ownership
Cons / Issues: No personal investment by Key Employee Not as motivating as stock ownership Less incentive for increasing company
value
Financial Toolbox - Key Employee Retention Strategies
Cash Based PlansTypes: Non-qualified deferred compensation
plans Stock Appreciation Rights (SAR) Phantom Stock Plans Supplemental Executive Retirement Plan
(SERP)
Financial Toolbox - Key Employee Retention Strategies
Cash Based Plans Non-Qualified Deferred Compensation Plan
Financial Toolbox - Key Employee Retention Strategies
Promise to pay benefits in the future for current & past services
Vesting schedule (“golden handcuffs”) Deferred compensation based on benefit formula
Company must meet its profitability objective for benefit formula to be achieved
No obligation to fund if Company is not profitable Forfeiture provisions Payment schedules – lump sum or multiple year
Cash Based Plans Non-Qualified Deferred Compensation Plan (cont)
Financial Toolbox - Key Employee Retention Strategies
Not taxable until date funds are withdrawn from plan (FICA)
Liability accrued and expense recorded for GAAP No tax deduction until amounts are paid from plan Funding
Ensure cash is available when needed Tax restrictions prohibit formally funding a plan
Cash Based Plans Phantom Stock & Stock Appreciation Rights
Financial Toolbox - Key Employee Retention Strategies
Key Employee receives something that: Looks like stock Grows in value like stock Can be turned in to cash just like stock
But is NOT stock
No actual ownership changes NO
Cash Based Plans Phantom Stock Plan
Financial Toolbox - Key Employee Retention Strategies
Phantom stock shares allocated to Key Employee
Phantom stock share value increases /decreases in relation to true company stock
Upon termination of Key Employee, “buy-back” phantoms shares at value of true stock
Amount paid is deductible to the Company
Cash Based Plans Stock Appreciation Rights Plan
Financial Toolbox - Key Employee Retention Strategies
SAR units allocated to Key Employee
Only receive appreciation of the true stock
CBIZ & MHM
Phantom Stock vs. SAR
Phantom Stock
Stock Appreciation
Plan Rights Plan
Award of 1000 shares when FMV is $10 $10,000 $10,000
At retirment, and fully vested, FMV is $25 $25,000 $25,000
Amount of Payout to Key Employee $25,000 $15,000
Financial Toolbox - Key Employee Retention Strategies
Cash Based Plans Supplemental Executive Retirement Plan
Financial Toolbox - Key Employee Retention Strategies
Provides supplemental retirement income to Key Employees
100% Company funded with no option for salary deferral Supplemental retirement income is paid from current cash
flow of Company Life insurance – untimely death Benefits taxable when received / deductible when paid
Summary
Financial Toolbox - Key Employee Retention Strategies
No matter what type of incentive plan you institute, it must meet the following criteria:
As Key employee attains goals, the Company value should increase
The plan “handcuffs” the Key Employee to the Company Plan objectives are meaningful, realistic, and well-
communicated Benefits are substantial Guidelines on how to achieve the benefit are specific
Prepare for the future - Technology
Financial Toolbox
Cash Flow & Working Capital
Management
Financial analysis &
BenchmarkingKey employee retention strategies
Financial Toolbox - Prepare for the Future - Technology
Unlike other industries, Construction sector has been slow to adopt new technologies….
But this is about to change very soon, and very dramatically!
Financial Toolbox - Prepare for the Future - Technology
Where Technology is Revolutionizing the Construction Industry:
The Office: Keeping Paperwork in Order Apps to share information between office and job sites Utilization of Optical Character Recognition (OCR) Software – In the cloud
Building Information Model (BIM) Comprehensive 3D file Incorporates all components that make up a building Integrative design process from the inceptions
At the Jobsite: Monitoring productivity Drones – monitor productivity, safety, and security Apps to share live construction drawings
Financial Toolbox - Prepare for the Future - Technology
Where Technology is Revolutionizing the Construction Industry: Autonomous Trucks: driverless solutions
Bulldozers to dump trucks remotely controlled
Materials: revolutionary or recycled 3D printing – printing complex, artistic structures
Robotics Automated robots used to construct beams, lay bricks,
paint, dig, drill, etc. Ability to perform construction remotely and unmanned
Equipment: Wearing your Tech Hard hats turning to Smart Helmets
Actually, the Future is Here – Embrace it!
Financial Toolbox - Prepare for the Future - Technology
QUESTIONS
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Please contact Joyce with any questions at:
816.945.5121 or [email protected]
Joyce Farris, CPA, CGMA
Shareholder, Mayer Hoffman McCannManaging Director, CBIZ MHM, LLC
Joyce, who has more than 30 years of accounting experience, serves as a CBIZ MHM, LLC Managing Director and Mayer Hoffman McCann P.C. Shareholder in the Kansas City office. Joyce is responsible for managing the entire client relationship as she coordinates the attest work with tax and consulting services. The majority of her clients are entrepreneurial-owned and privately-owned companies in the construction, real estate, and whole-sale distribution industries.
Joyce’s primary responsibility is to manage and direct the firm’s regional Construction Industry Services Group. From the day she started with the Firm, Joyce has been involved with clients in the construction industry from performing audits and preparing tax returns to consulting on mergers and acquisitions and transition planning. Joyce serves a variety of construction clients including general contractors, heavy/civil contractors, specialty contractors, engineering firms, landscape architectural/land planning firms, home builders and real-estate developers. Her clients have local, national, and international operations. During her career, Joyce took a leave from the Firm to pursue an opportunity as a CFO in private industry. This unique experience has provided Joyce with an in-depth knowledge of and respect for the issues affecting her clients and their respective COOs and CFOs.
Millennials in Hardhats: Attracting, Engaging and Incentivizing Ray Buyle, D.B.I.A – Associate Professor K-State School of Architectural Engineering & Construction Science Richard Bruce, Ph.D – Education & Training Director The Builders’ Association
Gotta Love Millennials
THANK YOU!!!EAT, DRINK & MINGLE