Construction Accounting Article -
Go, Cash, Go!
Smart strategies to keep your money moving

Target Audience: Construction Industry Professionals, Contractors, Construction Business Owners, Financial Documentations Interest, Cash Flow Regulations Interest

Many accountants will tell you that the most telling part of your financial documentation is the statement of cash flows. Sure, profitability is important, but if you’re not generating positive cash flow, you’re either burning through your cash reserves or getting deeper into debt. In either case, that well is only so deep, which is why you need to actively plan, manage and monitor your cash flow.

Coming up with a game plan

For starters, it’s essential to budget. This process begins with determining your backlog. You need to know what you’re going to bill over the next year. (Note: We’re focusing on annual cycles here, but the cycle most appropriate for your company may be different.)

Because you don’t get to keep all of the money you’ll collect, you must offset the associated job costs and your planned overhead against those billings. In addition, consider your capital needs, debt repayments and equity transactions during the coming year.

You’ll probably have other items you’ll need to consider, but the purpose of budgeting is to figure out what your pot of cash will be at year end. If you realize that your planned expenditures outweigh your planned collections, you’ll have found this out at the right time to assess your overhead levels or know that you’ll need to go harder after some additional projects.

If you have available credit facilities, try to leave them out of your cash planning. Put that option in a glass box marked “in case of emergency,” and break out the hammer only when absolutely necessary.

Executing the right plays

Once you’ve established your plan, set or revisit your cash management policies. If you haven’t done so already, look into a sweep arrangement with your bank that will allow you to earn some interest daily on your unused funds. That interest may not add up to much, but it might just cover your company picnic.

In addition, review your cycles for receivables and payables. If you determine that your collections cycle has gradually crept out another 10 days or so, rethink the timing of your payments to vendors and subcontractors.

Sometimes pride can get in the way. If you’ve always been one to pay your vendors within 30 days and sustained a significant job cost overrun, that pride can eat you alive. Just as you’re sometimes flexible with parties that owe you money, ask for a break from your creditors.

Another often useful tactic, if properly planned, is front loading your contract billings. This involves shifting some profits into earlier phases rather than applying a flat rate to all phases as usual. Thus, you can collect some of your profits before the retainer is finally paid at completion.

Of course, be careful not to get too greedy. If you submit a schedule of values that includes all of your profit in the early phases, you may get it kicked back to you — or worse, hurt a relationship you’ve worked hard to build.

Keeping score

Consistent, real-time monitoring systems that measure your performance are critical. You need them not just for tracking your actual job costs against your estimates, but also for evaluating your net cash flows.

Revisit your cash flow budget monthly to see whether your actual activity has been what you expected. You don’t want to put your head down during the first quarter, go to work and not realize until the fourth quarter that you’re going to miss your targeted cash flow goals.

When pursuing these and other strategies, bear in mind that you’re not the only one keeping an eye on your money. As you’re scrutinizing your billings and job phases, so is your surety! It will likely be checking out your job schedules to see whether your overbillings are out of whack.

Taking your best shot

In the topsy-turvy world of construction, there are no guarantees. But with a game plan for managing your cash, the right policies and consistent monitoring, you can take your best shot at keeping your money moving in the right direction — toward your bottom line.

3 often-overlooked cash flow threats

There are many elements that can sneak up on you and stymie your cash flow before you know it. Here are three to consider:

Equipment purchases. You can’t work without it. Yet new equipment can eat up cash in a hurry, so be sure to consider your needs carefully when laying out your cash budget.

Taxes. Taxes can put a huge dent in cash flow. Make sure you’re doing everything you can to take advantage of tax-saving opportunities. This includes using the appropriate income recognition method, taking investment tax credits when possible and revisiting how your company is organized for tax purposes.

Retainage. Collecting retainers at the end of a job can be a hassle, thanks to those seemingly never ending punch lists. But it’s no time to move your crew to the next job. You’ll be able to speed completion and retainage collection — and preserve that cash flow — by leaving the most knowledgeable team on site to clean up the punch list quickly and cost effectively.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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