Seven signs a contracting business is in trouble

Contracting businesses rarely fail suddenly. They fail slowly, over quarters, in ways that were visible to anyone looking at the right numbers.

The problem is almost never that the signs were subtle. It is that nobody was looking, because the books were four months behind and by the time they were current the situation had moved on.

Here are the seven that matter, and what each one actually means.

1. Gross margin sliding

Not a bad month — a direction. Three or four months of margin drifting down is the earliest reliable signal there is, because it precedes everything else.

Usually one of three causes: costs rose and pricing did not follow, estimating has drifted, or the work mix has shifted toward something less profitable without anyone deciding to. All three are fixable early and expensive late. See why profitable jobs still lose money.

2. Receivables ageing further out

Your average collection days creeping from 35 to 50 to 65 means you are financing more of your customers' work every month, out of your own cash.

Watch the shape as well as the average. A growing balance in the 60-plus bucket is worse than a rising average, because those are the ones that become uncollectible. See getting paid faster.

3. Paying suppliers later than you used to

This one is worth taking seriously because it is a symptom rather than a choice. Nobody decides to start paying late — it happens because the money is not there when the invoice is.

Forfeited early-pay discounts and a slipping payment pattern are usually the first outward sign of a cash problem, and suppliers notice before you do. See supplier terms.

4. Revenue growing, cash falling

The one that catches good businesses, and the reason it is dangerous is that it feels like success.

Growth consumes cash: more material, more payroll, all of it out before any of it comes back. A contractor can grow into insolvency while every report says the year is going well. Profit and cash are different things, and only one of them makes payroll. See cash flow forecasting.

5. Owner pay becoming irregular

If you are skipping your own pay to cover the month, that is not modesty — it is the business telling you it cannot currently afford to operate.

It is also the easiest sign to hide from yourself, because there is no invoice and nobody chases it. Pay yourself on a fixed schedule and record it when it is missed. A pattern of missed owner pay is data. See how much should I pay myself.

6. Tax money being used as working capital

The money set aside for tax gets borrowed for payroll in a tight month, with every intention of replacing it.

It is rarely replaced, because the next tight month arrives before the surplus does. Then a quarterly payment is due against money that has been spent, and the shortfall compounds with penalties. See quarterly estimated taxes.

7. Not knowing the answer

The last one is not a number. If you cannot say roughly what last month's gross margin was, what you are owed over sixty days, or what is in the bank against what is going out — that is the warning sign.

Every item above is only visible in books that close on time. A business running four months behind is not managing to plan; it is finding out what happened. And by the time you find out, the options that were available are gone.

What to do if several of these are true

Get current first. You cannot fix what you cannot see, and every decision made on stale numbers is a guess. See catch-up bookkeeping.

Fix price before volume. If margin is the problem, more work makes it worse and faster. This is the most common wrong instinct in the trades.

Chase receivables hard. Fastest cash available and it is already yours.

Talk to your bank early. Facilities are far easier to arrange while things look manageable. See getting a line of credit.

None of that is dramatic. It is ordinary, and it works — provided somebody noticed in time.

Related

• The eight numbers a contractor should look at every month
• A cash flow forecast you will actually keep up
• Working out your break-even number