Captivate Remodeling is a small, owner-managed construction company. The owner, Bob, typically works on a single residential remodeling project at a time. The business is very simple because Bob does not carry any inventory. The project is completed in four months, on average; thus, Bob can take on three projects each year. The total cost that he bills to his clients averages $400,000, so he books revenues of $1,200,000 per year. After accepting a project, Bob collects the payments from his client in two installments. He collects the first installment of $200,000 at the end of the second month, and the balance of $200,000 at the end of the project (i.e., at the end of four months). Bob’s expenses are largely payments to his subcontractors (e.g., plumbers, electricians, and so on). Bob pays all his subcontractors every week once they start on the job (for simplicity, assume that he pays his subcontractors four times a month). His margin on a project is 10%, so his payment for expenses every week is, on average, $22,500. Bob is constantly being asked to take on more projects due to his excellent reputation. He also has an excellent network of subcontractors and could easily take on more projects. He is thinking about taking on six projects each year and, instead of working on a single project at a time, working on two overlapping projects simultaneously.
- How much capital will Bob need to double his business?
- If Bob has only half the capital needed and cannot obtain any additional loans, what possibleavenues exist for him to achieve this growth?