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Cash Flow Management for Contractors

Posted April 12th, 2021

Cash flow management is essential to a construction contractor business. Every business shares a common need: Cash. It pays the bills, it keeps the lights on, it puts food on the table. Cash isn’t just king — it’s LIFE. Yet for many contractors, this critical aspect of their business is managed ineffectively or not at all.

We invited Suzanne Cox, CPA, CIT and shareholder at Saltmarsh, Cleaveland & Gund, to share some of the cash flow management strategies she recommends to her clients. Step one, she says, is to understand where your cash comes from, and where it goes. “If you haven’t done a formal cash flow for your business previously,” says Cox, “it’s a great exercise to walk through.”

Catch the entire conversation with Suzanne here:

Creating an Organizational Cash Flow

While we recommend working with an accountant, preferably a CPA, your first business cash flow doesn’t have to be a complex document filled with formulas you don’t understand. Start simple: What are your sources of cash?

There are three major sources of cash—operations (company revenue), investments, and finance (loans, lines of credit, equity raise). Most of a typical contractor’s cash flow will come from operations, from the work you perform. When you bill your customers or submit a pay app and then get paid, that’s a primary source of cash. Consider if you have other sources as you prepare your cash flow statement.

Now that you have your sources of cash, list out all the uses of cash in your company. Payroll, materials, insurance, fuel, all count as uses of cash. Don’t forget the overhead expenses it takes to run your business—rent or mortgage, vehicle payments, utilities, supplies, marketing or advertising, etc.

Bonus: Knowing your true overhead is critical to smarter bids that secure a good profit margin on every job. Learn why in our article Margin vs Markup.

Cox says that cash flow statements aren’t just for your organization; you should complete one for each new project as well. She says, “It’s very important to not only project your sources and uses on a company wide basis, but also on a project wide basis.”

Cash Flow Tracking

We created our Project Cash Flow Tracker (get yours on our Resources page) because we knew it was important for contractors to see how project expenses marry up to the job schedule and exactly how much cash is needed each week. The same is true for your organization. The cash you have in your bank account isn’t necessarily the cash you have free to spend. You need to know when cash is needed, what it is needed for, how much is needed, and where it is going to come from.

Tracking cash flow across your entire organization can also help you break the habit of borrowing from one project’s cash flow to start a new one. Instead, you can estimate costs for a new project, analyze your current cash flow statement, and make an informed decision about how you’ll fund that next big job.

Creating a cash flow statement and tracking cash flow across projects and throughout the organization can be a real eye-opener, says Cox. It can reveal cash flow gaps in advance, as well as highlight some areas where you could conserve cash. “In construction, contractor owners are very focused on the work, they’re focused on getting the job done, they’re focused on doing a good job, they’re focused on not getting sued. There are all these priority items in your business that take precedent. Making sure you meet deadlines, and you don’t have liquidated damage charges, things like that. And so sometimes the operation of the business takes a backseat. Just the exercise of walking through a cash flow is beneficial. What do I need to make my business run? Where may I be overspending? You’re looking for things you don’t need to spend money on that maybe you are spending money on.”

Whether its rethinking terms with customers or suppliers or reducing overhead, you can’t improve your cash flow until you are keeping track of it.

Cash Flow Tips

How you manage your company’s cash flow can mitigate problems or compound them. Treat your company like a project, with a fixed budget and an approved list and schedule of expenses. (Actually, some of you may want to treat it better than a project budget.)

A good understanding of your company’s cash flow can reveal gaps in cash flow and help you spot solutions. Can you decrease your payment wait time? Should your next contract be negotiated as paid within a certain time, or based on milestones. Those kinds of decisions impact the project and your organizational cash flow.

Don’t be afraid to be honest with your general contractor, says Cox. “A lot of subcontractors feel like their hands are tied, and that they’re going to have to do whatever the GC wants. But if you explain to the GC, ‘I’ve got this situation, I need to get paid at these times’ and collaborate and come up with a mutual agreement that they want to use, they’re going to try to come up with a mutually convenient situation.”

Decreasing payment time can also be an incentive. Offer to pay suppliers upfront in exchange for a percentage discount. Similarly, see if your GC offers a discount to speed up your payment time. To make this strategy work, you need to already know what cash sources you have, what uses you expect, what you need, and what you can offer.

Cash Flow Management for Contractors

So, who does all this cash flow management? We recommend working with a CPA, but it is also important, depending on the size of your business, to have a good accounting team or person. Communication is key for cash flow management to work. If you are not getting the reports you need, work with your team member or CPA to get them.

Your accounting team and your project teams need to start talking, too. Weekly team meetings is probably one of the most important things that you can do, says Cox. “Include your project management team with your accounting team. Some of you might be thinking, Oh, my god there’s no way that’s happening. My accountants cannot be in this meeting with my project team.” A transparent and clear line of communication between accounting and project management is key for both parties to see how their decisions impact each other. “Whatever you need to do to make it work, make it work.” If an initial estimate had 100 square feet of tile, and now you need 400 square feet of that tile, your accounting team needs to know if the project manager is getting a change order for the extra 300, or if the company is eating that cost. Because if it was an estimate problem or your company is absorbing the cost for some reason, your cash flow just went down by 300 square feet of tile, and it is your accounting team’s job to budget for that.

“That’s my top tip,” says Cox, “go back and talk to your people and try to get them to talk to each other.”

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