There are many times when I have a client call and say “I have a strong bottom line, but I don’t have the cash to pay taxes on it, or where is all my cash then?” Bottom line isn’t equivalent to cash flow. We see companies with strong earnings but are in a growth phase, so cash always seems tight. We have other companies that have a loss for the year but are able to cover cash flow needs and effectively run the business. In the construction industry there’s no shortage of what can go wrong – bad weather, accidents, insolvent owners, poor economy. However, there are a number of preventable deficiencies that you can address, which can help stop your cash flow from going down the drain.

Common deficiencies that kill cash flow:

  • Not closing out completed jobs – This can result in not getting final change orders dealt with and holds up final payment and the all so important retainage payment.
  • Assuming there’s nothing you can do to speed up collections and ignore the Accounts Receivable aging– Your contracts might have terms on payment or timing of invoices – sometime the terms are 30-45 days, yet somehow the contractor’s average day of accounts receivable is more than 60-90 days. That means that you have 15-45 days of the cycle in your control and you’re not proactively collecting. For every day past the terms, a customer doesn’t pay you’re financing them for free, and that is after you already financed them during the 30-45 day payment term.
  • Slow invoicing – slow payment – Rarely is a customer going to ask where their bill is, so if you’re slow to invoice and they aren’t asking for it, they’ll probably be slow to pay. Also make it easy for your customers to pay – in today’s electronic age maybe an online pay would be easier for them than cutting a check.
  • Retainage – Negotiate up front with your customers for a reasonable retainage percentage that won’t leave you cash poor. Also get in the contract that your retainage will be paid out once your part of the contract is complete, not when the entire contract is complete. If you are putting on the roof of a house, you should be able to collect that retainage once the roof is inspected and signed off on, you shouldn’t have to wait until the carpet and paint on the walls is dry to collect your retainage.
  • A lag time between expenditures out and receipts in. Try to at a minimum pre-bill for materials and work with vendors to give you enough time to receive payment before you have to pay the vendor.
  • Underbillings – while underbillings are an asset – you’ve performed more work (and probably means spent more money) than you’ve billed for which means you aren’t converting work done into cash.
  • Overbillings – overbillings may get cash into your business before you’ve earned it just don’t forget overbillings are a liability and don’t spend that cash on something unrelated to that job that you have a required future performance on.

Did any of the above sound like your company? If so – What to do:

Communicate with your staff:
  • Stop the pain before it starts – discuss with your sales and estimating departments that getting paid on time is very important and therefore it is important to secure work from companies that have a reputation for paying on time. And work with those involved in billings to ensure they billing timely and follow up on collections.
  • Keep project managers and superintendents updated on job progress verses budget. And work with staff to monitor over and under billings and understand the impact of each on future cash flows.
  • Make sure your staff understands that change orders can be the death of a job. Make sure there are standard processes in place to manage change orders to secure proper approvals and avoid being burned by unapproved or undocumented changes.
Communicate with General Contractor (GC) and Owners
  • Before bidding a job or agreeing to a job find out what payment terms the GC or owner is accustomed to. Ask questions to make things go smoother like: When should we submit billing? Who do we submit to? Are there any special paperwork requirements? In the negotiations make sure you agree to fair terms on retainages. Also make sure you know how their change order procedures work.
  • Also discuss issues such as proof of insurance, lien releases, certified payroll. And ask what issues have come up in past that delayed payments to vendors.
Communicate with Subcontractors (subs) and Vendors
  • Once you have learned from the GC or owner their payment terms, communicate it to your subs or vendors and then let them know how you will pay them accordingly.
  • Identifying the cash killers in your company and being proactive about fixing them will help keep your cash from going down the drain. Cash flow planning is challenging and inexact, but it is critical to be aware of potential problems in order to minimize impact on the business.

What else can I do?

  • Your accounting firm and CPA can help you evaluate if you have any cash killers and provide suggestions for efficiency in cash flows. With our team, we pool our expertise working with construction clients and filter what is relevant to your business, then get to work figuring out what strategies can help you improve your situation.


Disclaimer: All content provided in this article is for informational purposes only, and is subject to change. Contact a DS+B professional before using or acting on any information provided in this article