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A resource from RocketLevel for restoration company owners working through a hard stretch, backed by decades of experience in the trade. About a 6 minute read. This is general business information, not financial or legal advice; involve your own advisors for your situation.
Plenty of restoration companies hit a hard stretch at some point: a cash crunch, a run of unprofitable jobs, a key person leaving, growth that outran the systems. In our experience the ones that recover get the order right, and the common mistake is chasing more revenue when the real problems are cash and margin.
A turnaround starts with an honest diagnosis, which is hard when you are stressed and busy. The warning signs are usually visible if you look: cash is always tight even when you are busy, you are not sure which jobs make money, overhead has crept up, a few clients or one channel carry too much of the revenue, and you are reacting instead of deciding. Name the real problem before you act. Chasing more work to outrun a margin or cash problem just makes a bigger version of the same problem.
Profit matters, but running out of cash is what actually kills a company. The first job in a turnaround is to stop the cash from running out, because you can't fix anything from insolvency. Build a short, honest cash forecast, what is coming in and when, against what must go out, accelerate collections on everything you are owed, slow or stage non-essential spending, and arrange a credit line or reserve if you still can. Buying yourself a few months of runway gives you the room to fix the deeper problems.
"Slow or stage non-essential spending" has limits. Each of these looks like a payable you can push, and pushing any of them turns a business problem into a personal one that can outlast the company.
Payroll tax deposits. The withholding is not your money. Under IRC 6672 the IRS assesses the Trust Fund Recovery Penalty personally against a responsible person who willfully fails to pay it over, and willfully means exactly what a turnaround feels like: choosing to pay other creditors first. The penalty is the full unpaid trust fund tax plus interest, it follows you personally past the entity, and whether a bankruptcy can discharge it is a question for a bankruptcy attorney, so do not count on it.
Wages, and final pay on any layoff. Wages are due on the regular payday regardless of your cash position. If you lay people off, final pay carries its own clock. In California, Labor Code 201 makes final wages due immediately on discharge and Labor Code 203 adds a waiting time penalty of up to 30 days of wages for each late employee. A round of layoffs paid two weeks late can cost more than the payroll you were trying to preserve.
Job funds that belong to your subs and suppliers. Many owners have never heard of this one, and it carries the heaviest penalties. Your state may make money you receive on a construction project a statutory trust for the benefit of the subs and suppliers on that job, which means spending it on last month's payroll or a different job is misapplication, however much it felt like a cash-flow call at the time. Texas is explicit: Property Code 162.001 makes construction payments trust funds, 162.031 makes it misapplication to intentionally or knowingly divert them without first paying the obligations owed to the beneficiaries, and 162.032 makes misapplication of $500 or more a Class A misdemeanor, or a third-degree felony where there is intent to defraud. New York's Lien Law Article 3-A is another version, and your state may have one too, so look up yours. Robbing job B to finish job A is the classic turnaround move and in a trust-fund state it is a crime.
Customer deposits on work you have not started. A deposit is money you owe work against, and using new deposits to close out old jobs is the mechanism by which a struggling shop becomes a fraud case. If you cannot perform, refund it.
Workers compensation and general liability premiums. Letting coverage lapse to save a month of premium is the fastest way to end the company outright. Whether operating without workers compensation is an offense, and from what headcount, is state law, so look up yours; uninsured injuries land on you personally, and a lapse in general liability breaks the insurance requirements in your commercial contracts and can pull you off every account you have. Cut something else.
What you can stage: discretionary vendors, marketing, software, non-urgent equipment, your own draw. Start there, and start by calling the people you are about to be late to rather than going quiet.
A struggling shop is exactly the customer a merchant cash advance is designed for, and the fixed daily debit does not slow down when your collections do. Read the annualized rate rather than the factor rate, find the personal guarantee and any confession of judgment before you sign, and treat it as a last resort with a defined exit. If the forecast does not show the advance being repaid from real, dated collections, it will speed up the slide.