It doesn’t matter what business you’re in, “cash is king”, and truly knowing your cash flow as opposed to monitoring cash on hand will allow you to better manage your business and bottom line. This is especially important — and difficult — in the construction industry, which has some unique issues, including a unique revenue recognition model, cost accounting, retainage receivable and payable and contracts that can have front end loaded costs that don’t mirror the billing cycle, to name a few. You must calculate accurate cash flow projections to address day-to-day activities. Otherwise, you’re placing your business at serious risk. Cash flow is that essential. The goal is to maintain a level of working capital that allows you to make it through crunch times and continue to operate your business.
How can you take charge of cash flow? Here are some ideas to get you started:
- Schedule of values as a tool: Consider evaluating and revising your schedule of values to “front-end load” the billings on contract. This will particularly be helpful on contract with a large up-front cash commitment as well as those with retainage.
- Mind your payroll. You cannot be late paying your employees, so you always have to have cash on hand, even if customers’ payments are late.
- Consider subcontractors. When cash is tight, use of a subcontractor allows you to negotiate the billing cycle and potentially normalize the cash flow of an otherwise self-performed task that could require an inconsistent and volatile cash requirement.
- Don’t pay bills too quickly. A particular bill may come attached with certain terms — and there’s no need for you to exceed them. Of course, don’t let bills pile up, but if an invoice is stamped “net 30 days,” don’t automatically pay it in two weeks. If it takes 30-60 days to collect from yoru customers, consider those same terms for your vendors and subcontractors.
- Finance when possible. You need to make a major equipment purchase or are in growth mode and have upcoming projects with a significant initial cash outlay for mobilization, bonding and materials? Don’t pay cash — you may need it later. Consdier using your LOC or in the case of an equipment purchase, consider a term note. A common point of oversight is using liquid working capital (short term asset) to purchase equipment as opposed to financing (long term debt), this results in a direct reduction of working capital. Yes, you’ll have to pay interest, but it could be worth it to keep a cash reserve.
- Go high tech with your projections. Use the latest accounting and construction software to help you predict your income and outflow before you even get started.
- Keep on top of “change orders.” These are an inevitable part of construction, and some customers change the scope of a project frequently with little notice. Process these quickly so you don’t fall behind on the fees they represent.
- Send out those bills. In some situations, even weekly billing is acceptable, and it gets your clients into the habit of writing checks on a regular basis.
- Learn your lessons. Compile a list of best practices, and modify it as necessary after each project when you see what worked and what didn’t.
Building and keeping adequate working capital provides maximum opportunity and flexibility so you can sleep soundly. Without practicing proper cash management, you won’t be able to make strategic business decisions timely when both opportunities and issues arise. YHB can be your partner in making sure that your systems and processes are designed to ensure that proper cash management is an integral part of your culture.