Articles Written by Charles Vander Kooi

3 cultures found in every successful contracting company

By Charles Vander Kooi

I've worked with contractors for almost 38 years, and I have discovered that the ones who are most successful and profitable all have the same 3 successful cultures within their companies.

Every company has an overall culture, just like every country has a culture. Certainly, in Mexico, they have a different culture than the United States. In China, in Afghanistan, they definitely have different cultures.

When I visit a company, it doesn't take me very long to discover what the cultural elements of the company are. The culture always starts with the owner, and goes down from there.

1st culture – finances

The first culture that any successful company has is a commitment to watching their finances. I'm not just talking about the checkbook and the checks that are written. I'm talking about the health of the company, the financial health.

When I call a new contractor client, I ask them to send me their financial statements. They always ask me if I want the balance sheets too. I know what they're thinking; but, yes, of course, I want the balance sheet too.

Most contractors throw the balance sheet away when they get their financial statements. They’re only concerned with the profit & loss statement. How much did I sell? What did it cost me? Am I making money? Now, as important as those things are, they are not as important as what they have thrown away: The balance sheet.

When I was very young, back before computers were everywhere, I spent some time in the hospital. At the end of my bed was a clipboard. Nurses would come in and take different tests and measurements, and then they would write on that clipboard. I wondered what they were writing. I wanted to get out bed to take a look.

Then, the doctor would come and see me. The first thing he would do is take that clipboard off and look it over. He would say to me, "It looks like you're getting better.” Or, “It looks like you're about the same.” Or, “It looks like you are getting a little worse."

What was on that clipboard? There was information that told him how healthy I was. Did I have a cold? Did I have pneumonia? Did I have viral pneumonia?

It is the same thing with the balance sheet. The balance sheet is like a clipboard on the end of your company's hospital bed. It tells you how healthy your company is. That's why I always want to see that balance sheet.

I've worked with contractors whose companies are very healthy, but a look at their profit & loss shows they're losing money. Of course, we're concerned about stopping their loss of money. If they keep losing money, they're going to get unhealthy. A healthy company might be able to lose money for 2 or 3 years before it becomes sick. The overall health of your company is an important piece of information to know beyond whether you’re making or losing money.

Thing 1 – asset/liability ratio

Now, there are 2 things that I look for on the balance sheet. Number 1 is the ratio between account current assets and current liabilities. This ratio has to do with how much money people owe you versus how much money you owe others.

To have a healthy ratio, you should have at least a dollar and a half in current assets for every dollar of current liabilities. That's a healthy company. When the liability side of that ratio starts to grow, the company starts to get sick. If it gets to a dollar for every dollar, you've got viral pneumonia. You are on the cliff with your toes hanging over, and the cliff is called bankruptcy.

If you only have 75 cents in current assets for every dollar of current liabilities, you are technically bankrupt. You can continue to operate, but if you don't turn the company around and start making money, you're going to be done.

Thing 2 – owner’s equity

The second thing I always look at is retained earnings, your owner's equity. I have spoken to CPA conventions, CPAs who specialize in construction accounting. I have literally got down on my knees and begged them not to use the words, “retained earnings” or “owner’s equity.”

I tell them, "You've got to understand who you're dealing with." Because, when a contractor sees “retained earnings,” he says, "Who's retaining it from me? I want to take it and buy a new boat!" If a contractor hears “owner’s equity,” he begins to think like he thinks about his house: “I have a $200,000 in equity; I’ll get an equity loan and buy a new boat!”

That's not what that part of the balance sheet should say. Retained earnings and current (owner’s) equity are really working capital. A contractor needs to maintain current equity for working capital at a level where it is at least 10% of expected volume. This will keep you out of tremendous cash flow problems and allow you the ability to borrow on a line of credit and operate.

When it gets below 10%, it doesn't necessarily mean you're bankrupt. It just means you are going to have some tremendous cash flow problems. It is not wise to grow your company until your working capital equals 10% of your volume (with the expected growth included). Otherwise, you won’t have the cash flow you will need when doing a higher volume.

2nd culture – production

The 2nd culture is a culture of production where somebody is making things happen. This is best measured by production hours. If you are bidding correctly as my books and my seminars have explained, you will have in your bid the amount of production hours that it will take to do that job. Somebody's got to watch that.

Somebody's got to make sure that you don't use more hours than you had in your bid. Somebody has got to make sure the level of production in the field is at least equal to what you projected in your bid. Or, if you find that your bids are the problem, you’ve got to change your bids to cover the hours your people are actually working in the field.

3rd culture – coaching

The 3rd culture has to do with becoming a coach rather than a dictator. I used to always ask contractors to send me their organizational chart. I didn't really need to ask because they all looked the same. Up at the top, was the CEO/President/Grand Poobah, the owner. Down below him, in some kind of format, were sales, accounting, project management, field ops, etc.

The concept is that the buck stops with the owner. Everything flows to the top and then the owner takes the responsibility for finding a solution for every problem that exists in the company. Now as you can imagine, that certainly wears an owner out when he has to deal with every detail of everything going on in his company. But, that’s how it is for a dictator; you have to make every decision for everybody.

Assign a “book of work”

There is an alternative to dictatorship. Take your company and divide it into several small profit centers. The profits centers don't even have to be for different types of work. You can have several for the same type of work, but each has somebody else in charge of a book of work. For a larger company a book of work might be $1 million or more. If you've got 3 managers, you’re going to do around $3 million. Those managers are given autonomy to run their book of work.

Then, you become their coach rather than a dictator. When they have a decision to make and they are not quite sure what to do, they come to you. You approach it as a learning experience, and coach them towards the right direction. Then, along with you, they're just part of the staff.

For all the support people for each particular profit center, you build a mentality that you are the coach of the team, and no longer the dictator. When they become baffled, or have a question they take a timeout from the game, and come and ask you. That doesn't mean you let the profit centers go with abandon. You stay attuned to what’s going on. When someone makes a bad decision, you approach it as a coach. You say, "How could we have done this different?" And you talk it thru.

This article is an excerpt from Charles Vander Kooi’s new seminar entitled, “3 cultures found in every successful contracting company.”

Charles is President of Vander Kooi & Associates (VKA) helping business owners add more to the bottom line of their company's financial performance. VKA offers seminars, workshops and private consultations. Contact VKA by calling (303) 697-6467 or visiting VanderKooi.com.