How I Fixed a $10M Contractor in 90 Days

This company was making $10 million a year and still broke. Low profit, cash was constantly tight, and the owners, well, they were discouraged, exhausted, and burning out. In just 90 days, we completely turned around the business and gave them more profit, more cash flow, and more clarity.

Let me show you how. Now, this is the exact same framework that I've been using for over a decade to turn around and grow businesses, generating over a billion dollars in value in the process. It's time-tested, it works.

I'm going to show you how you can do this in your business as well. So let's go ahead and jump in. Let me give you a little bit of a backstory on this company here.

So the company was a contracting company in the construction space, okay? So it's a contractor and they were doing $10 million in revenue, just top line revenue. Now, from their operating profit standpoint, they were only earning 3%. Now, they are a specialty contractor, so in their space, they should have been earning 10%, all right? So they were far below just the industry average for this space here.

So they're really struggling, and because their margin was so low, they were constantly being squeezed from a cashflow perspective. So their cashflow is really bad. Let me just draw a sad face here because the owners were definitely stressed out because they never had enough cash for payroll, they were pulling on their line of credit, or they'd make payroll and they're the last ones to get paid.

They weren't doing dividends and distributions like they agreed to at the beginning because there just wasn't enough cash. And they were making all this money, right? They're bringing in all this revenue and they saw all this growth, but they're like, where's the money? And a lot of this stemmed from having no strategy. So when I first went into the business to turn them around, I said, okay, send me your strategy for the company.

And they're like, we don't have a strategy. And I'm like, okay, well, what are you doing? And it's essentially go get work and do work, get work, do work, get work, do work. And I was like, well, how are you guiding business development efforts? How are you guiding your pricing decisions? And all that was being based on the gut decisions that were being made by the ownership team, right? So that's what was going on with the business.

And when I talked to the owners, these were the pain points that bubbled up to the surface. They were making more revenue, right? So their revenue was increasing. They're doing more sales, but there was no money.

So it was like, where is the money going? They also complained because they were working harder, but they weren't seeing the results, the fruit of their labor. In fact, they were making less the harder they worked. And they thought back to the days where they're making $5 million in revenue.

And they're like, we were taking bigger distributions at the time and we're paying ourselves more. And now things are tighter and we have less cash doing more revenue. And the last thing they said was we can't scale like this because everything feels like it's on fire.

I don't know if you've ever felt like this in your business. You wish you could be more proactive, but you're definitely reactive. You're just going around and putting out fires.

Instead of being the chief operating officer of the company, you're the chief fire putter out or officer of the company, if that's even a role. So that's what was going on in the business. Let me show you how this happened, because this is how it occurs in most companies.

Now, I like to say that crises unfold in three stages. First, a company starts to experience a strategic crisis, and this happens because they don't have a strategy. Now let me back up.

When I say they don't have a strategy, every company really has a strategy, whether it's formal or not, they're pursuing some type of strategy. But what I'm talking about here is they didn't have a system for their strategy where they could go out there and build a strategy, measure the strategy, learn from the strategy, and then make adjustments along the way. So because they didn't have a strong strategy for their business, they started to experience a profitability crisis.

So in their case, revenue was going up, but costs were going up and their margin was going down because they didn't have a good pricing strategy. And like I said, costs were getting out of control and they're having some other issues, which was causing profitability to decline here. And it led them into this last phase, which is the liquidity crisis.

The liquidity crisis happens because profitability is dropping. Customers aren't paying on time. Accounts payable is being mismanaged.

Inventory is going up. Their work in progress wasn't being closely monitored. So they were in an under-billed position and cash flow is really tight, had a lot of money in retention, etc.

So they weren't managing working capital and they were making some bad decisions as it related to their CapEx, their investments in trucks, trailers, equipment, their building, etc. All right. So they found themselves in this liquidity crisis.

And when you get into this liquidity crisis, ultimately what happens is you start running out of cash. And cash flow is the biggest thing that causes companies to go bankrupt. So this is where we enter it into the scene right here during this liquidity crisis.

Now, I could tell you from our perspective at Coltivar, it's so much easier to turn around a business when you move back here to the left. So if we get into a company and we realize they don't have a strategy process and they're starting to enter into a strategic crisis and we could fix them right here, it's so much easier, right? This is where it gets really fun because the challenge has already been escalated and the businesses are about to run out of money.

So the earlier you could catch this during these three phases, the higher your probability is of survival. Because I could tell you a lot of companies don't reach out or they try to fix it by doing more revenue. And what happens is they go bankrupt. So this is death right here. You do not want this. Very sad face right here. RIP.

So this is how it unfolds in most companies. And I'm going to walk you through now the exact steps that we took in order to fix the business. This was the 90-day plan that we rolled out.

So when we go and work with a company, we like to move fast. So within 90 days, this is what we typically put in place for a business. And I'm going to walk you through these steps.

So first was phase one. Phase one involved diagnosis. So what we had to do is we had to gather their financial statements. And we looked at their income statement, their balance sheet, and their statement of cash flows. And we looked at historical trends.

But more importantly during this diagnosis phase is we evaluated their margin gap. So this was their current margin in their business. And let's just say this is the operating profit when I'm referring to operating margin. This was 3%. And their potential right here, so their potential operating margin, operating profit was 10%. So they had this gap of 7%.

Now just extrapolate that across the revenues. 7% times $10 million, that's $700,000, $700K that they were bleeding. This was the upside. Because when we go into a company to turn them around and put in place a 90-day plan, let's say we did the same exact analysis and we realized the upside was only 50 grand.

Well, there's not a lot we could do. It's like, just keep going, keep improving things along the way, and you'll be fine. So we always like to find at least $100,000 at upside.

So for this business, $700,000 is what you're bleeding. That's a ton of cash. If you think about it, it's like $2,000 every single day.

The reason why we move fast with the 90-day plan is, let's just say the business owner is like, well, let me get back to you in 20 days. I'm like, you're going to burn through $40,000 by delaying this decision. So we went in there day one, we did a diagnosis, and we identified this gap.

And then more importantly, we identified exactly where they were bleeding. So there are eight levers to this gap.

Number one is pricing. So looking at their pricing model and their estimating model, we realize there's a major problem. I'll get into that here in a minute.

Number two, there's volume. This is another lever that impacts the gap. So it's the amount of units that they're selling, the number of projects, in other words, that they were winning, their bid-win ratio and how they were filling their backlog.

Number three is cost of goods sold, the cost of delivery, the cost of fulfilling the revenue.

Number four is OPX, which is just short for operating expenses. So this is the cost structure, how much it costs to run the business, the overhead.

Number five is accounts receivable. This represents the amount of money that customers owe you. All right. So if you're not getting paid on time or fast enough, then it could be a real cashflow strain on your business.

Number six is inventory or your WIP. And since this is a contracting business, we're looking at their over-under billings and their retention, right, based on their WIP.

Number seven is accounts payable, how much money you owe your vendors.

And then number eight is your CAPX, your capital expenditures. So these are the eight levers of the business. And we evaluated these levers to identify, okay, where is the potential upside, especially in the next 90 days to free up cash and to drive better improvement.

So we identified those very quickly. And then we moved forward with the next phase.

The next phase, phase two was our design phase. And during the design phase, what we had to put in place was a strategy. Now, oftentimes when people talk about strategy, they make it so complicated or they make it so black box-like where nobody understands exactly what it's about.

With our strategy, we put in place this key document, which outlined where the company is going to compete, how they're going to compete, and ultimately how they're going to win. And then we put in place what we call IARs, initiatives, actions, and results to drive execution.

And part of this strategy was to fix their pricing model. And since this was the biggest lever for the company, we narrowed in on their pricing. This involved increasing their perceived value to their customers, because you can't just raise your pricing typically and not expect to lose customers.

So in order to not lose customers and to increase the conversion rate, we had to strengthen the business's offer, their perceived value, the throughput, the quality they're delivering on these projects, and that supported a higher price. So we did that.

We also looked at their estimating process, and they didn't have a formal estimating process. They had a spreadsheet with a bunch of rows and columns and calculations as a mess. So we helped them to formalize their pricing.

And during the process, we figured out that their labor cost was way off. Their labor cost was off by like two bucks. And that was a huge cost to the business.

So we tightened that up and we helped them to understand their numbers. And that wouldn't have been possible if we didn't do the first phase, the diagnosis phase, where we dove deep into the numbers.

Number two, what we did is we simplified the business. So we simplified and focused. We simplified because we had a strategy in place and we knew what was the most important thing to be focusing on and how to solve problems better for customers.

So anything that didn't support the strategy, we cut. So we eliminated a lot of overhead, a lot of unnecessary cost. We also eliminated friction. We invested in better equipment to increase their throughput.

And we focused the business on the things that mattered the most. And that came through our initiative action and result framework, because we were giving continuous guidance on the actions they were pursuing. And if these actions didn't support the strategy and didn't drive better financial performance, we didn't even pursue it.

So it was a relentless focus on the right actions.

And then number three was we reset their cost structure. So we made the business simpler. We looked at the organizational chart. We eliminate some positions that were adding value and we reset the way they were conducting business.

And there were some processes and reports that were legacy to the business. They'd been around for a long time. It's like, yeah, John put this in place. We're tracking this and that.

It's like, who's looking at this? Nobody. How much time is it taking? 15 hours for accounting. We're like, eliminate that.

So we did that across the business. We reset the cost structure and we started to see an immediate improvement on cashflow and the overall financial performance of the company.

All right, number three, phase number three, in other words, involved the delivery. And what we did here was we installed our financial operating system. That may sound fancy, but essentially what it was and what we do this all the time is:

Number one, we have a forecast where we look out into the future and we could understand not just revenue and profit. That's great. That's what most companies do. But cashflow, right? We wanted to pay attention to this cashflow line item.

And we had that built out for the next three years on a rolling basis. So we had our forecast. Plus we had this KPI dashboard. So we had all these KPIs listed out with actuals versus targets.

And this is what it looked like. We had green, green, green. We also had some yellows. I just don't have a yellow marker here. So just bear with me here. We'll just do green and red. It'll look like Christmas.

But this is what the KPI dashboard looked like. So leaders could get into this platform very easily. This is all done on our platform. And they could see which things were on track and which things were off track. And they made improvements immediately.

And then the last piece was the financial review cadence. And we call this the FSR. And the FSR is when you do a financial strategy review.

So you're looking at your KPIs. You're also looking at your strategy. And you're determining, okay, are our initiatives correct? Are we focused on the right actions? Are we getting the right results? And you're making adjustments along the way.

So you're driving continuous improvement. And this all fits together. That's why we call it our financial operating system.

Because when you look at the KPIs and you have your strategy, and let's just say something's not working. You're like, we need to hire somebody in business development to grow the business faster. So you do that.

Well, guess what? That cost needs to show up here on the forecast, because then that's going to feed the targets over here with the KPIs. And this is going to inform the strategy. So this is how the entire financial operating system works and how we installed it in this business.

The next thing we did was we aligned incentives. There's a good way and a bad way to align incentives. You want to be super careful with aligning incentives based on the KPIs of the organization, because what you want to avoid is bad behavior.

Think about Wells Fargo. Years ago, they had a strategy in place. They put in place KPIs. And one of the KPIs involved the number of accounts that they were opening on behalf of their customers.

And so here they were hitting their KPIs and even exceeding them. And the employees were getting their bonuses because they're opening all these accounts, but they're opening all these accounts fraudulently. So you want to avoid that.

And that's why you have to be careful with tying KPIs back to incentives. Instead, we like to tie incentives to relative performance. And let me explain that.

Let's just say you have your revenue and this is your revenue projection. And you say, if you get to here, you get a bonus because you're right here right now. Well, this is the gap you're hoping them to pick up on.

If you're not careful, you could create a lot of bad behavior because they could sandbag or they can hit their goal and then they just take it easy and go on cruise control.

So instead, what we like to look at is how did they perform period over period on a trailing 12-month basis, relative performance? Because think about it like this. What if their revenue actually looked like this and is far below the actual target?

Well, maybe that's good because what if the economy took a nosedive by 20% and they're able to grow revenue by 5%? That's good because the rest of the industry is going down by 20%.

Or vice versa, what if you went out there and you won a big contract and it's super profitable and you're able to grow revenue by 20% and hit your target, but you should have very easily been able to hit 30%? You are actually performing very poorly on a relative basis.

So we like to measure relative performance and we do that through what we call success measures. So every single employee in the organization, we install success measures for them so they know exactly what does success look like on a relative basis for each of their roles.

All right. So you have KPIs measuring the overall strategy of the business and you have success measures measuring people in their specific roles. And that's how we install this incentive program to align behavior with the results that we wanted to generate from our strategy.

All right. Let's talk about some results because this is where it gets really fun.

Number one, revenue increased from $10 million on a trailing 12 month basis to $10.5 million on a trailing 12 month basis in 90 days because they got super focused. They clarified their offer. They had a better pricing strategy and they're able to win more jobs at the same time.

Their operating margin, their operating profit went from 3% to 7%. So it didn't get to the 10% within 90 days. I know, kind of crazy, but look, that's huge. That's a huge improvement.

They doubled or more than doubled their operating profit just in 90 days by making those improvements on a trailing 12 month basis.

They also took their cash and we measured this in days of cash. In other words, how much cash do they have to cover their overhead, their OpEx? And they were at five days when we started. They moved that to 22 days in just a 90 day timeframe.

Also, the owners had more clarity. They had more confidence. And best of all, everybody felt re-energized, which was really cool to see because now their employees came into work and instead of being depressed or exhausted or discouraged because they were feeding off the energy of the owners, they were actually excited because they saw that the system worked.

And then since they had this financial operating system, they were able to replicate the same results. And think about that — when you're winning, like success begets success.

So they just continued to be more and more successful. And as time went on, they beat their operating margin targets. So they're operating above industry average right now and they're doing super well.

The return on invested capital in fact is like 25% the last time I checked. So they're crushing it.

And the reason why they're able to crush it is because first they diagnosed the problems correctly. Number two, they designed a solution by putting in place a strategy. And then number three, they delivered by putting in place this operating system, which allowed them to build, measure, learn and adjust.

All right. Now, how can you put this in place in your business?

There's definitely an order. And let me walk you through that.

Now, the winning formula is: first you have to uncover the margin. So remember when I did that gap analysis and I looked at the current value versus the potential value and I evaluated the gap, first you have to free up margin.

I'm not just talking about financial margin. I'm talking about operational margin and leadership margin, because if you don't have processes and systems in place, it's going to be really hard to capture this margin. And from a leadership perspective, if you don't even have time to do strategic type work, to be more proactive, you're going to be stuck putting out fires.

So it goes: margin, which then leads to cash. And when you have cashflow, you can reinvest in the business. You could pay down debt or you could pay yourself, do distributions as the owner.

And then this cash right here will then fund revenue growth — in this order. There's definitely an order.

Do not do the backwards order. This is where most companies get into trouble. They first grow. They hope they have enough cash. And then they think that one day they're going to improve the margin and everything's going to be great.

So definitely use this formula in this exact sequence and you will be very successful.

I just walked you through the entire playbook of how we turned around a $10 million company in 90 days and made them extremely profitable. And you can use this exact framework in your business.

If you ever want to talk strategy, you can always book a free 20 minute strategy call with my team by going to coltivar.com.

All right. Until next episode, take care of yourself. Cheers.