Contract Cost Analysis – How Much More Expensive Labor and Materials Impact Your Bottom Line

08:48 06 July in Blog

The surge in inflation we are currently experiencing occurred because of a number of disruptive events coming together to form a perfect storm of too much demand and not enough supply. The rate of inflation is the highest in over four decades. Contractors will need to take action to protect their bottom line and cash flow, and secure additional working capital to finance the higher cost of materials and supplies, payroll, and other operating expenses.

What Caused the Surge in Inflation?

The disruptive economic events began with the onset of COVID-19. Pandemic restrictions around the world resulted in record unemployment, the shutdown of non-essential manufacturing and production, and severe disruption of all forms of transportation. As a result, the U.S. and other major countries had economic contractions not seen since the Great Depression.

Several countries reacted with unprecedented fiscal stimulus programs and more accommodative monetary initiatives to provide liquidity and facilitate an economic recovery. The fiscal stimulus programs in the U.S. resulted in a record level of “excess savings” which helped fuel the imbalance in demand and supply when the economy began to open up.

After vaccines were rolled out, pandemic restrictions were eased, setting the stage for a tsunami of consumer spending in the U.S. and other advanced countries. The nascent recovery, however, was very uneven around the world. Major manufacturing and transportation centers could not ramp up to meet the surge in demand because of labor and materials shortages and transportation equipment that was not in position around the world. These events snarled supply chains globally.

Fuel costs, which had been already on the rise, were added to the fire with the war in Ukraine, further disrupting supplies of energy, commodities, and metals, causing prices to spike.

Is the Surge in Inflation Temporary or Will It Last for a While?

The wave of inflation we are experiencing has become pervasive, affecting consumers, manufacturers, transportation, distributors, service providers, and construction contractors. The prices of goods and services from gasoline, groceries, and airplane tickets to labor, No. 2 Diesel Fuel, copper tubing, and cement have increased significantly.

The disruptive events created shortages in key raw materials, commodities, metals, and labor, and bottlenecks in shipping and transportation, which drove up the costs for these goods and services. Producers, manufacturers, and transportation providers passed these additional costs along by raising prices to wholesalers, retailers, and contractors. Retailers in turn raised prices for the final consumer.

Inflation can be temporary when it doesn’t permeate the entire economy, and prices fall as demand drops and shortages ease. Take lumber for example. Prices rise and fall with demand from the construction industry. The price of lumber does not directly affect the entire economy and becomes embedded in the cost of many end products.

In other cases, inflation can last for a while when the supply of a number of key inputs is affected, and demand and shortages remain at elevated levels. Price increases permeate the entire economy and become embedded in the cost of many products and services.

Examples of this situation are No. 2 Diesel Fuel and labor. No. 2 Diesel Fuel is used extensively in transportation and construction equipment. It impacts the cost of many products and services. Its cost may remain elevated for some time due to geopolitical events and the transition to renewable energy. The cost of labor impacts the cost of all products and services. It may stay elevated for some time due to shortages caused by the pandemic and reduced labor force participation.

In addition, a paradigm shift in supply chains to avoid exposure to geopolitical risks, increase sources of supply, and shorten replenishment times may continue to increase costs for the foreseeable future.  

How Cost Increases Impact Contractors

Inflation will reduce your gross profit on contracts and increase the cost of overhead resulting in a smaller profit or even a loss. Additional working capital will then be needed to finance your business operations. 

Gross profit is eroded by higher costs for labor and material inputs. The following are examples of cost increases for construction material and labor reported by the Bureau of Labor Statistics.

Construction Material Inputs

May 2022 YTD 2021 AVG
Non-residential 12.5% 18.5%
Residential 15.5 18.3
No. 2 Diesel Fuel 70.2 79.8
Aluminum Shapes 17.4 25.0
Lumber/Plywood 15.4 41.1

Average Hourly Earnings All Construction Employees

Average Hourly Earnings % Change from Prior Year
May 2022 $34.56 5.8%
May 2021 $32.65 4.1%
May 2020 $31.27

 

Overhead costs are also increasing as inflations permeate the cost of goods and services throughout the economy. Salaries, benefit programs, insurance travel, utilities, and many other business goods and services are increasing. Unlike some construction material costs, which fluctuate with changes in demand and supply, overhead costs tend to become embedded in a company’s cost structure and are more challenging to reduce.

In addition, supply-chain issues may result in the need to carry more materials and supplies, further increasing the working capital needed to fund projects.

In an inflationary environment, you will need more working capital to fund purchases of materials and supplies and pay salaries wages, and operating expenses. In other words, you would need more money in the next 12 months to finance the projects you worked on in the last 12 months. 

Tips on Mitigating the Effects of Inflation on Gross Profit and Overhead Costs

Contractors can take a number of steps to mitigate cost increases with changes to contract language and operations, including:

  • Contract Language Changes
    • Mobilization clause – Negotiating this clause into the contract will demonstrate good planning and transparent communication that prompts customers to agree to advance a mobilization fee or deposit. This helps minimize timing issues created by mobilization costs. 
  • Price escalation clause – Add language to allow price increases under certain criteria such as increases in a construction cost index, or increases exceeding a cap or price range.
  • Uncontrollable events – Add language to allow changes in price due to uncontrollable events including changes in tariffs, duties or trade policies, epidemics, wars, and market conditions.
  • Force Majeure clause – Add language to protect against events or effects that cannot be reasonably anticipated or controlled.
  • Operational changes
  • Pre-order material and stock up on inventory.
  • Hedge forward purchases of commodity items.
  • Postpone or delay projects.
  • Fix costs as soon as possible.  Ensure the risk of price increases from subcontractors is mitigated by promptly binding subcontractors. 
  • Adopt new construction techniques that reduce labor and/or material content.
  • Automate business processes to reduce overhead costs.
  • Use technology tools to facilitate project management.
  • Adopt best practices such as Target Value Delivery to manage projects to bid targets.

How Invoice Factoring Can Help Contractors Manage in an Inflationary Environment

In an inflationary environment, the faster you convert accounts receivable to cash to purchase tangible assets such as materials and supplies, the easier it is to stay ahead of inflationary price increases.

Invoice factoring can help to accelerate the conversion of accounts receivable to cash. With invoice factoring, you can convert your outstanding accounts receivable to immediate cash instead of waiting 60 days or more for your customers to pay. The cash can then be used to accelerate your purchases of materials and supplies and help avoid price increases. 

Inflation will likely impact our economy for some time due to the perfect storm of disruptive events coming together to create shortages and increase demand. You can prepare your company by acting now to secure the additional working capital you will need with an invoice factoring program.

Vehicle Exporter Purchase Order Financing Case Study

03:11 05 July in Blog, Case Studies

Headquartered in Westchester, New York, this Client is a unique specialty export financing business involved with the sale of new and used vehicles such as BMW, Mercedes Benz, Audi, Porsche, and Range Rover. They finance the purchase of luxury automobiles and sports car in North America and Europe for export to independent car dealers and traders in China, Vietnam and other Asian countries.

Background

  • The Client purchases luxury automobiles and sports car in North America as well as Europe for export to independent car dealers and traders in China, Vietnam and other Asian countries.
  • Payment for the vehicles is made via Irrevocable Documentary Letters of Credit with the Client as the beneficiary of the export letters of credit.

Company Challenges

  • The Client lacked the liquidity to purchase the vehicles required to fulfill the documentary requirements of the export letters of credit.

Capstone’s Solution

  • Established a pre-export PO Financing Facility based on the value of the letter of credit and the cost of the vehicle to be exported.
  • Capstone makes cash advances to the car dealer to purchase the vehicles which are then drop-shipped to the port for export to Asia.
  • The proceeds of the letter of credit are paid into a blocked account that Capstone has dominion and control over. Upon receipt of funds following the presentation of documents to the LC (letter of credit) issuing bank, Capstone recovers the advance and any accrued fees sending the net proceeds (Client’s profit) to the Client.

Progress and Future Outlook

  • Since 2019, Capstone has funded 282 vehicle exports transactions averaging $10MM in exports per year. 
  • The Biden administration has reduced U.S. sanctions on China opening up the export market more than during the previous Trump administration.
  • In early 2022, the Client renewed the Purchase Order Financing facility with Capstone for an additional two years.   

 

 

Wholesaler Master Factoring Facility & Purchase Order Financing Case Study

14:04 21 June in Blog, Case Studies

Wholesaler Master Factoring Facility & Purchase Order Financing Case Study

Based in New Orleans, Louisiana, this Client is a wood and construction products wholesaler. Formed in 2009, the Client was originally a wood products wholesaler however they built a disaster relief segment a few years ago in response to hurricanes and flooding in Louisiana, Texas, the Virgin Islands and Puerto Rico.

Background

  • The Client primarily provides product procurement and related logistical assistance required for a particular disaster area. 
  • They are recognized as a high value-added niche player within the disaster relief industry, as they are able to handle all logistical matters in addition to sourcing and procuring the associated product required under very tight deadlines.

Company Challenges

  • The Governor’s Office for the State of Louisiana issued a disaster relief purchase order to the Client for the delivery of 250 recreational vehicles (RVs) to be given to residents displaced by Hurricane Irma.  
  • The RVs had to be sourced from 50 different vendors throughout the United States and needed to be delivered within five days of receipt of the $11MM purchase order.

Capstone’s Solution

  • Provided an $11MM Master Factoring Facility. 
  • Opened an $8MM PO Financing Facility to facilitate the purchase of the RVs.

Progress and Future Outlook

  • The Governor’s Office of the State of Louisiana was so impressed with their performance they are issuing the Client another purchase order for 500 RVs.

 

 

Tools to Increase Productivity and Profits for Factor Consultants and ISOs

18:15 14 June in Blog, Broker Resources

Do you feel like you’re working as hard as ever but not accomplishing what needs to be done to be successful as a factor consultant or independent sales organization (“ISO”)? 

Take a minute to do a quick assessment of how your business is doing.

  • Is your client list growing?
  • Is your volume increasing?
  • Are you contacting enough potential clients to keep your pipeline full?
  • Is your percentage of conversion of prospects into clients improving?

If the results of your assessment are not in the affirmative, then you need to take steps to increase productivity, business volume, and profits.

There are three actions you can take to improve your results.

  • Avoid distractions
  • Focus on value-added activities
  • Use technology tools to eliminate manual activities and improve productivity

Avoid Distractions

Email, text messaging, smartphones, and social media can be powerful tools for communication, but they can also become a source of distraction and reduce your productivity. It’s very easy to let yourself become a slave to answering emails and text messages, and fall into the habit of reading and responding to social media postings and surfing the internet. 

A simple internet search will provide a plethora of tips on how to use these communication tools without becoming addicted to habits that can sap your productivity. These tools should work for you, not vice versa.

Focus on Value-Added Activities

Value-added activities such as prospecting for clients, making presentations to prospects, onboarding new clients, and building volume with existing clients help to increase your business volume and profits. When you are distracted or your day is filled with busy work, you will not have enough time to devote to value-added activities. Planning is the best tool to use to focus on activities that will grow your business volume and increase profits.

An annual plan can help guide you to the areas you need to focus on to achieve your objectives. A weekly/monthly plan laying out what you need to do to keep on track can help to synthesize your annual plan objectives into the value-added activities you need to focus on in the near term. And of course, a daily To-Do list is always a helpful tool to use to maximize your focus on the value-added activities you need to work on.

When you develop plans, short-term or long-term, be realistic. Don’t try to do everything. Planning too many activities will reduce your productivity and you won’t do the activities as well as you should. Focus on value-added activities and work toward your plan goals.

Use Technology Tools to Eliminate Manual Activities and Improve Productivity

Time is a limited resource. You need to conserve time for value-added activities. Manual activities waste the limited time you have available. Technology tools can help you to minimize the amount of time you spend on manual activities.

Here are some technology tools that can help you be more productive.

Automate Business Processes

If you still have manual business processes, it is essential to automate them ASAP for two reasons. 

  • Your clients and business partners, e.g. factors, probably have fully automated business processes. It will be difficult for you to continue to do business with them if you don’t automate. And, they may not want to continue to do business with you if you don’t automate.
  • Manual business processes can consume a huge amount of your time that could otherwise be spent on value-added activities. List your manual business processes and estimate the amount of time you spend on them weekly/monthly. You’ll probably be very surprised at how much time you could save by automating your business processes.

Time Management

When you own a small business of any kind, including a consulting firm or ISO, the boundaries between your personal time and business time can be opaque, which makes time management critical to your success.

  • If you aren’t using a calendar software application such as Google Calendar or Apple Calendar which are free, or Microsoft Calendar for Microsoft users, you will probably do a better job managing your time by planning your week/month and benefit from the automated reminders they provide.
  • Use online retailers, consumer apps such as grocery shopping and delivery, and restaurant meal delivery to free up time to spend on your business. 

Marketing and Communications

The value-added activities you want to focus on revolve around identifying, attracting, contacting, and communicating with prospects and clients. Following are some tools that can help you be more productive in these areas.

  • Customer Relationship Management (CRM) software can increase your productivity by streamlining customer interaction. CRM organizes client profiles, history, and conversations in one location. It gives you a concise overview of your client interactions with dashboards that provide the information you need at a glance and also allows you to schedule and automate communication.  It is not uncommon for consultants to have several thousand client prospects and networking contacts so therefore you cannot effectively build relationships without this tool.
  • Email Management Software (EMS) applications can help you to manage large volumes of inbound emails. EMS helps you to track and respond to priority messages and quickly archive and retrieve emails.
  • Social Media Management (SMM) tools can help you engage with prospects and clients. SMM enables automated and real-time posting to multiple channels. It gives you the ability to monitor social media and learn about client preferences. SMM allows you to post to multiple platforms at once and can be used to consolidate a number of networks with just a few clicks.
  • File sharing tools can help with document management and the deal submission process.  It enables you to securely distribute, collect, and organize documents more conveniently with clients and other third parties.  This tool can be particularly useful in efficiently working with large clients or with complex transactions.  It also will expedite the underwriting process once the deal is submitted to the factor company. 

Technology tools, focusing on value-added activities, and avoiding distractions can improve your productivity and profits.  This will help you work efficiently and effectively with clients and will greatly improve the probability of approval by the factor company during the underwriting process.  Your business volume will grow and so will your profits.

Capstone works with factor consultants and ISOs to help them be successful. Capstone has the resources and experience to help you increase your business volume and profits. For additional information on resources to assist you, please read: consultant Resources – Capstone Capital Group (capstonetrade.com)

Minority-Owned Supplier Master Factoring Facility, Purchase Order Financing & Letter of Credit Case Study

14:41 08 June in Blog, Case Studies

This Client is a globally diversified supply-chain solutions company with offices in New York and Shanghai, China.  They provide all supply chain services from procurement, warehousing, distribution, fulfillment and transportation and has a broad portfolio of service offerings.

Background

  • The management team has experience with servicing the world’s leading consumer product manufacturers. 
  • The Client is able to assist small businesses to large corporations with their supply chain needs.  
  • As a certified minority contractor, they have dedicated contracts from New York City agencies for materials required to conduct the City’s business and maintain and improve its assets.

Company Challenges

  • The Client received contracts totaling $2MM from the New York City Housing Authority (NYCHA) to supply generators.   
  • Two of the generators are manufactured in China.  The terms of the sale were 30% down payment of the COGS and 70% of the COGS upon shipment of the goods to the USA.

Capstone’s Solution

  • Provided a $2MM Master Factoring Facility. 
  • Opened a $1MM PO Financing Facility and issued two Letters of Credit to Chinese manufacturers for each generator.

Progress and Future Outlook

  • Based on the Client’s ability to issue letters of credit and arrange for the delivery of the generators, NYCHA has given additional orders.
  • The new orders are for materials required for construction and maintenance of the apartment buildings and related infrastructure owned by the City of New York.

 

Purchase Order Financing vs Invoice Factoring

02:36 06 June in Blog

Purchase order (PO) Financing and invoice factoring are two financial strategies that businesses can use to purchase inventory or materials and accelerate the conversion of accounts receivable into cash.  With so many financial products out there, it is easy for people to be confused about these financing tools, how they work, and their advantages. 

The two strategies are closely related but they are distinct.  Helping business owners understand the difference will allow them to be paired with the right financial strategy and will also make them more comfortable using these financial tools.

What PO Financing and Invoice Factoring Are Used For

PO financing (aka purchase order funding) and invoice factoring are both used to address cash flow issues and provide working capital, but they are utilized at different stages in a transaction cycle.

PO financing is used to purchase inventory, materials, or other resources related to specific purchase orders or contracts.  It provides funding to a business’s vendors or suppliers so they may fulfill an order or get started/ complete a project.

Frequently, small and medium-sized businesses are unable to obtain credit from suppliers or a loan from a bank to purchase inventory or materials due to varying circumstances.  It is important to note that in certain instances where the supplier is located outside the U.S., a letter of credit is usually required.  PO financing provides businesses with the ability to fulfill orders as well as perform work BEFORE they’ve invoiced and received payment for the invoices.  In essence, it’s an advance against the funds a business expects to receive once their customer’s invoice is paid and is meant to cover the cost of goods sold.

Invoice factoring, on the other hand, is a financial tool that businesses use to accelerate cash flow by selling their unpaid invoices for a completed order or project to a factor company at a discount. Businesses receive cash immediately for their unpaid invoices instead of waiting for their customers to pay.  This funding can then be used for things such as payroll, operating expenses, growing the business, moving on to the next contract or project, etc.

How PO Financing Works

Invoice factoring can be used by itself to accelerate cash flow without also using PO financing. However, when PO financing is used, invoice factoring is also used to complete the financing transaction.

The steps in a PO financing transaction include: 

  • Client receives an order or enters into a contract with their customer.
  • Client forwards the purchase order to their supplier and the supplier provides an estimate of the cost to fill the purchase order.  In cases when the client enters into a contract for a service or project, the client obtains estimates for materials or other resources from the respective vendors.
  • Based upon the need for funding, the client enters into an agreement with a factor company to fund the purchase of inventory, materials, or other resources for the specific purchase order or contract.
  • The factor pays the supplier/ vendor through cash proceeds (or with a letter of credit if the supplier/ vendor is located outside of the U.S.), and the client takes delivery of the inventory or materials.  The proceeds may cover up to 100% of the cost however the client may have to pay out of pocket to make up any difference.
  • Client completes and ships the customer order, or performs the work contracted for and invoices the customer.
  • Client assigns the invoice for the completed order or services to the factor. The factor purchases the invoice once the validity of the receivable is verified and makes a partial advance on it first deducting the supplier/vendor payment and fees.
  • Once the related balance under the PO financing facility is retired, the client is then eligible to receive the remainder of the factor advance amount depending on the terms of the factoring agreement.
  • Client’s customer will remit payment for the invoice directly to the factor.
  • The factor receives payment on the invoice from the client’s customer and deducts the factoring advance as well as factoring fees, and remits the balance to the client.

How Invoice Factoring Works

The steps in an invoice factoring transaction include:

  • Client enters into an agreement with a factor company.
  • Client completes and ships the customer order, or performs the work contracted for and invoices the customer.
  • Client assigns the invoice for the completed order or service to the factor. The factor purchases the invoice once the validity of the receivable is verified and makes an advance to the client depending on the terms of the factoring agreement.
  • Client’s customer will remit payment for the invoice directly to the factor.
  • The factor receives payment on the invoice from the client’s customer, deducts the factoring advance amount and factoring fees, and remits the balance to the client.

Advantages of PO Financing

PO financing allows business owners to increase the necessary working capital required to boost sales, increase product or service offerings, and allows the business to gain the edge over the competition.  

PO financing is more accessible to obtain than a bank loan and may be easier to qualify. The credit underwriting decision is based on the financial strength of the client’s customer, unlike a bank that uses the business’s credit profile regardless of the income and cash flow that will result from fulfilling a firm purchase order or contract.

This is particularly important in light of the Federal Reserve’s change to a tight monetary policy, and the possibility that it might induce a recession. In this environment, bank credit requirements are tightened. Banks favor large customers and have a tendency to reduce credit exposure to small and medium-size customers.

PO financing may sometimes cover up to 100% of the supplies, inventory, or resources needed to get started/ complete a project or an order.  All the while without using credit available under existing lines of credit. It also enables clients to pursue business opportunities, which they might not otherwise be able to do because of insufficient working capital financing, and it can also be a stepping stone to developing a relationship with a supplier that leads to open-account terms.

Advantages of Invoice Factoring

Invoice factoring helps to accelerate cash flow by converting accounts receivable to immediate cash. Clients will not have to wait 60+ days for their customers to pay an invoice. Having access to those funds increases cash flow and reduces the need to draw down on availability under existing lines of credit.

An invoice factoring facility is also easier to obtain than a bank loan, and the credit decision is based on the financial strength of the client’s customer, not the client.  Invoice factoring facilities are more flexible to use than bank loans. In addition, they can be custom-tailored to fit within a business model.

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While PO financing and invoice factoring are both designed to provide solutions to a business’s working capital needs, the key points to consider are the timing of when the funds are needed in the transaction cycle and the use of funds.  Understanding the differences will help pair the right financial strategy with the right type of business. 

Tips on Bidding New Projects in an Inflationary Environment

11:10 23 May in Blog

The surge in inflation driven by record fiscal stimulus, pandemic lockdowns and restrictions, supply-chain disruptions, and the war in Ukraine has created a major challenge for business owners in the construction industry in bidding on new projects and maintaining sufficient cash flow.

Many of the commodities used in construction are subject to changes based on third-party events outside of your span of control such as changes in world market prices and geopolitical events. Despite the Fed’s tighter monetary policy, inflation appears to have become embedded in the economy and may continue to persist at elevated levels for some time.

Construction Cost Increases

The following table lists some examples of changes in the Producer Price Index (PPI) reported by the Bureau of Labor Statistics for key materials and other inputs used in construction.

Year-Over-Year Change in December PPI
Construction Inputs 2020 2021
Steel mill products 5.2% 127.2%
Plastic construction products 5.4% 34.0%
Aluminum mill shapes -1.7% 29.8%
Copper and brass mill shapes 24.0% 23.4%
Gypsum products 3.6% 20.7%
Lumber and plywood 37.0% 17.6%
Diesel fuel -2.8% 55.0%
Truck transport of freight 2.2% 18.0%
Construction machinery and equipment 1.1% 10.0%

Along with these costs, labor and wage costs have increased in response to inflation and worker shortages. Average hourly earnings in construction rose 5.8% from February 2021 to January 2022 for hourly tradesmen. The average for similar workers in the overall private sector jumped 6.9%. Unfortunately, these wage increases have not kept pace with inflation and further wage increases may be required to keep your skilled staff employed with your company. 

Overhead costs have also experienced inflationary increases. Personnel costs, rents, and other administrative costs have surged. Unlike construction materials costs, which rise and fall with demand and supply, overhead cost increases tend to become ingrained in a company’s cost structure.

Impact of Inflation on Profit Margins and Cash Flow

Inflation in construction costs has squeezed contractor profit margins significantly. The PPI for input costs rose 1.8% for the 12 months to September 2020, matching the 1.8% increase in PPI for bid prices. But the 19.6% increase in PPI for input costs for the 12 months ended December 2021 far outpaced the 12.5% increase in the PPI for bid prices. 

Contractors must take steps to factor inflation into bid prices, improve the accuracy of their bids, and ensure the project retains profitability.  Inflation erodes a project’s profit margin and if left unchecked can create serious cash flow issues. 

The risk of inflation increases with the size, length, and complexity of a project. Size increases the potential magnitude of impacts from inflation. The length provides the opportunity for inflation to occur and reduces the reliability of estimates. Complexity increases the number of variables subject to potential change. 

Whether you’re a general contractor, subcontractor, or in another segment of the construction industry, the following tips will help you develop your project bids in an inflationary environment. 

Tips to Improve Bid Development Process

Review the way your company develops bids to improve accuracy. 

  • Checklists – Use checklists to ensure all important items are included in the bid.
  • Carefully review plans – Check takeoffs and measurements to improve accuracy.
  • Attend pre-bid meetings and site visits – Review project requirements and get clarification when needed.
  • Technology – Use software to improve estimates and accuracy of bids.
  • Subcontractors – Review past performance, bid details, and pricing. The lowest bid isn’t always the best if the job is late or performed unsatisfactorily.
  • Labor costs and practices – Review local labor costs and practices. If union labor is used, review work rules and how they will impact productivity and costs.
  • Financing costs – Work the cost of financing, or factoring services, into the price to your client.
  • Bid the right projects – Bid on the projects that fit your company’s strengths.
  • Expiration date – The bid should have an expiration date so you have the opportunity to rebid if the bid validity date passes to account for the higher cost of goods.

 

Implement Project Management Tactics

If your bid is accepted there are many project management tactics that can be used to mitigate the effects of inflation.

  • Time material purchases – Careful timing of purchases can help to contain material costs, especially when seasonality is a factor.
  • Monitor costs – Perform regular variance analysis to determine which costs are trending upward.
  • Hedge commodity prices – Use futures contracts to lock in prices of key commodities.
  • Inventory – Stock up on inventory to protect your business from future price increases if you have the cash to do so.
  • Discounts for early payment – Manage your cash flow to regularly take advantage of early-pay discounts offered by your suppliers and vendors.  These discounts can really add up.  
  • Critical suppliers and vendors – Identify critical suppliers and vendors then negotiate.  Some may be willing to offer better pricing to maintain a valuable customer. 
  • Best practices – Use best practices such as Target Value Delivery to empower your team to manage the project to bid targets.
  • Technology – Incorporate technology to facilitate project management.
  • Performance and quality control – Complete the project on time and maintain a high level of quality control. Your customer may be more open to accepting future bids with more robust profit margins if they know they can count on you and will receive quality results.  

 

Include Inflation Terms in Contract Language

Construction cost inflation has not exceeded 5% for over three decades so many contractors do not have experience in an inflationary environment. Adding a few percentage points to bids for inflation won’t protect you sufficiently in this type of environment either.

There are many different approaches to mitigate inflation risk in bids.

  • Time and material – Charging for actual time and materials cost shifts the risk of inflation to the customer. Customers may not accept this approach because it doesn’t place limits on costs.
  • Price adjustment mechanism – Language that permits an increase in price under specific circumstances, such as – if the cost of concrete exceeds X then the price of the contract may be increased by Y.
  • Collar – A price adjustment mechanism that works for both price increases and decreases. This can be a good alternative for commodity materials which can be subject to large swings in price.

 

Take Control of Inflation’s Impact on Your Working Capital with Factoring

Inflation increases the amount of working capital needed to fund a project and also negatively impacts your cash flow if left unchecked. Invoice factoring through funding sources such as Capstone is an excellent cash flow management strategy for construction contractors looking to combat inflation’s negative effects.  Business owners obtain the additional working capital needed to finance projects as well as the cash flow for operations. Factoring can be provided for a single invoice/ payment application, or as a program for all of your accounts receivable.  Credit approval is based on the financial strength of your customer, not the creditworthiness of your business.   

Keep in mind that in an inflationary environment, the value of your accounts receivable lessens the longer they remain outstanding.  Instead of waiting 60+ days for customers to pay, business owners can convert their outstanding invoices to immediate cash.  Having access to those funds provides you with staying power until cash flow catches up with expenses. 

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How Capstone Can Help

Capstone Capital Group, LLC is a leading commercial finance company that is focused on providing businesses with sufficient access to working capital. Capstone has the experience and resources to provide customized invoice factoring and PO financing programs that fit your needs in an inflationary environment. 

Funding Strategies For Businesses To Weather a Recession

16:15 05 May in Blog, Broker Resources, Business Funding

A growing number of business leaders and economists have warned that the U.S. is headed for an economic slowdown or possibly even worse, a recession.  Are your clients prepared?

Surging inflation is driven by a tsunami of fiscal stimulus from Federal and state governments, and supply-chain constraints resulting from pandemic restrictions have made it necessary for the Federal Reserve to begin tightening the money supply and increasing interest rates.

The Russian invasion of Ukraine made matters worse by precipitating a leap in prices for energy, agricultural commodities, and metals. The Fed will probably need to tighten faster and harder than initially anticipated. Economic pundits have begun to reduce forecasts for economic growth and start discussing the possibility of the “R” word. 

The time to prepare is now.  Financial brokers can use the following strategies to help small and mid-sized companies plan ahead to weather a recession.

Accelerate Cash Flow

The key to surviving a recession is cash flow management.  In a recession, cash flow is often reduced due to a number of things including customers stretching their accounts payable to conserve cash. As a result, business owners may experience a deceleration in their own cash flow and may have to use available credit facilities.  Having high accounts receivable balances outstanding for an inordinate amount of time can be detrimental to the sustainability of a business.  A double hit to cash flow and available credit can seriously impair a business owner’s ability to meet its financial obligations. Accelerating cash flow with invoice factoring through a factor company, such as Capstone, can help to reduce this dual impact.

Invoice factoring accelerates cash flow by speeding up the transaction cycle. Instead of waiting 60+ days for customers to pay, business owners can convert their outstanding invoices to immediate cash. They will have more cash available to fund operations and reduce the need to draw down available credit facilities.

Avoid Slashing Key Programs and Personnel

When an economic slowdown occurs, it is common practice for businesses to cut operating costs in order to conserve cash.  A mistake many businesses make, however, is cutting key sales, marketing, and product programs.  These programs are the link to customers as well as the marketplace, and the source of future growth.  Cutting key programs may cost business owners much more in the long run than they will save in the short run.

The pandemic spawned a change in the labor market making hiring and retaining personnel a major challenge for many businesses. Cutting headcount to reduce operating costs and conserve cash should be carefully evaluated to avoid recruiting costs and problems hiring people that may delay ramping up when the economy recovers. 

By resisting the urge to implement drastic cuts in these areas, business owners will be able to position themselves to capitalize on the recession and potentially scoop up market share that competition left behind through their cost-cutting.  

Increase Working Capital Facilities

Adequate working capital and the right type of facilities are also critical to weathering a recession. 

If a business owner needs additional working capital, they should apply now. The Federal Reserve’s monetary tightening and interest rate increases, combined with the possibility of a recession will make it more difficult if the business owner delays. In a tight monetary environment, banks and other traditional financial institutions tighten their credit requirements and favor larger customers while reducing their credit exposure to small and mid-sized companies. 

Work with a Factoring Company

During a recessionary period, smaller community banks and other traditional financial institutions may not be able to provide adequate working capital because of lending limits. Also, many businesses may find they will fall outside the acceptable risk threshold to access and retain lines of credit as well as more traditional business funding from these sources.  Let the prospective client know that you may be able to help in the event they are unable to qualify for increases to existing credit facilities or new facilities. 

While these financial sources prefer to lend to businesses with only positive financial performance, stable cash flows, and predictable revenues, factoring companies, such as Capstone, can often work beyond these issues and provide funding based on the quality and financial strength of a business owner’s accounts receivable.   Many businesses also often require faster approvals and access to funds than banks and other typical lenders can offer. Because of these obstacles to obtaining traditional loans, business owners should consider business financing alternatives, such as invoice factoring and P.O. financing.  

Invoice factoring and P.O. financing won’t tie up availability and can be used to supplement existing credit facilities. They are easier to obtain than bank loans, and the terms are more flexible. Alternative financing facilities can be custom-tailored to meet a client’s business requirements. More importantly, approval is based on the financial strength of the prospective client’s customers, instead of the business’s credit profile.

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Business owners can survive a recession and be in a position to take advantage of opportunities by implementing the above strategies now.  They will also avail themselves to more funding options when they are not operating in crisis mode and when the financial health of their business is at its strongest.   

Whether we’re simply seeing an economic slowdown or a full-fledged recession, Capstone is here to help your clients stay focused on what they do best – running their company.  We have the experience and resources to custom-tailor invoice factoring and P.O. financing programs for your clients.

 

Recognizing Potential Transaction Red Flags in Factoring

12:24 04 April in Blog, Broker Resources

The key to being a successful factoring broker is to identify and develop leads that have a high likelihood of being approved by the factor company you work with. The flip-side of this is that successful factoring brokers avoid leads that are marginal and have potential issues which may result in their application being denied.

Questionable leads can be a huge time suck that diverts your time and effort from identifying and developing leads to increase your business volume.

Identifying problematic leads can be difficult however experience will help you recognize the signs that point to potential problems. These signs are red flags that the lead you are trying to develop may not result in an approved client.  Avoid problematic leads by recognizing these 10 transaction red flags.

Incomplete information

The prospective client refuses to provide information or documentation and is suspicious. Documentation contains many errors, misspellings, and inconsistencies with company names.  The prospective client is unable to send all their documentation and/ or due diligence in one or two email submissions.  Legitimate clients are cooperative and provide complete as well as error-free information and documentation on a timely basis. 

Account debtors with bad credit

Client customer (“account debtors”) with weak and unfavorable trade references, poor payment history, new banking relationships, and absence of credit facilities are red flags for potential problems. 

Evidence of collusion between the prospective client and its customers 

A sudden large increase in credit terms followed by the customer’s insolvency, or a surge in volume with a new customer that has limited trade and bank references and is unable to pay, are examples of possible collusion.

Transaction has been shopped around to different funding sources or promoted by other brokers Transactions that have been shopped around are a good indicator that there are potential problems. Factor companies most likely will not decline business opportunities unless there are red flags.

Prospective client is a start-up or has very limited operating history 

Companies that are start-ups or have limited operating history have a much higher risk of operating and financial problems.  There is always the chance that the business may be a front for financial fraud or to pass on risk.

Web and social media presence 

Most companies need web and social media presence to be successful. Little or no internet infrastructure is a red flag for potential financial fraud or an indication that the prospective client does not have sufficient business experience.

Spotty client background

Excessive litigation, unfavorable media coverage, and a poor reputation in its industry. Prospective clients that are contentious and difficult to deal with are a higher risk for operating and financial difficulties, and they may simply not be worth the hassle of doing business with.

Body language of the client

A prospective client’s body language can say a lot.  Being overly aggressive or even desperate, nervousness, evasiveness, inability to hold eye contact, confusing and contradictory statements, and unexplained urgency or requests for short cuts with changes to the transaction at the last minute are all red flags.

Transaction has unusual features or trends – size, nature or frequency of transaction 

Unusually large transactions, a few large single-invoice sales, increasing volume in a declining economy, a significant increase in sales to a new customer, and significantly more generous credit terms may be indications of potential problems.  Transactions that are unusual for prospective client’s profile or significantly different than past history and industry norms are all red flags.

If the transaction seems too good to be true, it probably is.  Unrealistic assumptions and projections not supported by past history or expected trends in the industry and economy, and documentation that shows no past due accounts, DSO equal to credit terms, or other unlikely KPI results are warning signs. A sharp increase in sales volume that is not consistent with past history, sales and marketing programs, and industry and economic outlook may indicate falsified sales.

Direct-to-consumer (DTC) sales or other sales issues

Sales must be business-to-business (B2B) for the accounts receivable to be eligible for factoring.  Many businesses today are trying to sell their products DTC, and some businesses may have both DTC and B2B sales so be on the lookout for any prospective client’s sales that may be to consumers.

Consignment and guaranteed sales which are sales that are subject to any contingency other than normal returns in the course of business for quality or delivery issues are also red flags.  Prospective clients with retail customers experiencing high levels of returns, chargebacks, sales allowances or large sales deductions may result in customer (account debtor) payments not satisfying the amount advanced to the client.  This may necessitate a reduction in the advance rate, or jeopardize the viability of the factoring program.  

Learning to recognize potential transaction red flags will save time for you and the factor you work with. Time that you can use to successfully identify and develop viable client leads to build your business volume. 

Capstone has the experience and resources to help you build your business volume. For more information on Capstone’s broker resources, please read:  Broker Resources – Capstone Capital Group (capstonetrade.com)

Feature: The Secured Lender – Women in Secured Finance 2022

13:54 31 March in Blog

Please join us in congratulating Jessica Governara, National Marketing Director of Capstone, for being featured as one of The Secured Lender Magazine’s “Women in Secured Finance.”

Continuing the celebration of Women’s History Month, we are very proud to highlight Jessica’s contributions to our firm and the commercial finance industry.

https://www.sfnet.com/home/industry-data-publications/the-secured-lender/magazine/tsl-digital-issue

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