Cash Flow – The Ins And Outs

By Steve Carter, CPA, Principal
ASL Construction Group

During last December’s AICPA National Construction and Real Estate Industries Conference, I attended a break-out session discussing cash flow for contractors. It was outstanding! How often does one talk about how vital cash flow is to the construction business? The phrase “Cash is King” cannot be more important for contractors.

Let’s talk about what cash flows means, what goes into creating positive cash flows, and best practices to maximize cash flows.

Cash Flow

This may sound simple, but cash flow is a combination of cash inflows and cash outflows. To make this a net positive, you need to understand how to generate and control the inflows, and manage the required outflows.

Creating Positive Cash Flows

For a contractor, the primary source of all inflows and outflows is PROJECTS! Construction is a “cost recapture business.” Your project fee (revenue) must cover your direct costs as well as the indirect costs. Not understanding what your indirect costs are lead to smaller margins, and possibly money left on the table. Remember – direct and indirect costs are incurred if and only if you have revenue activity. Direct costs – materials, labor, and subcontractors are readily understood. But think of indirect costs as all those costs that would not be incurred if you do not have jobs! Examples are depreciation on operating equipment, insurance, small tools, cell phones for field employees, and estimating costs. Know your indirect costs, include them in your project estimates and account for them to derive your project revenues.

Maximizing Cash Flows

Step 1 is negotiating for revenue that provides a healthy gross margin. Step 2 is billing and collecting your revenue. Billing and collection policies and procedures that are monitored, reportable, and measurable are vital. These policies and procedures must be in writing, and consistently applied and enforced. Such best practices include enforcing early your rights to collect and involving the Project Managers in collecting past due amounts.

Important fact – it is more important to collect monies than it is to pay monies. Some ideas to help you be more successful in this area are: negotiate longer payment terms with vendors; correlate draw requests to job payments; maintain adequate but not excessive inventory levels; work with a bank that knows construction and have a line of credit. These are just a few of many ways you can better control cash outflows.

Understanding and implementing these concepts within your business begins the process of improving your cash flow.

In later newsletter articles we will go deeper into this critical aspect of running a construction company with healthy cash flows. Look for future discussions on budgeting, cash flow reporting that is quick and easy to generate, project cost controls, and proactive tax planning. All of these can and will make your company healthier and stronger.