0323: How To Manage Cash Flow Properly In Your Contracting Company

This Podcast Is Episode Number 0323, And It Will Be About How To Manage Cash Flow Properly In Your Contracting Company Construction company cash flow is the movement of money in and out of your contracting business; these movements are known in accounting circles as inflow and outflow.    Inflows for your construction company primarily come from the sale of goods or services to your customers, but keep in mind that inflow only occurs when you make a cash sale or collect on receivables. Cash is king! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.   Outflows for your construction company are generally the result of paying labor, material, other direct and indirect costs of goods sold and overhead expenses.   Is cash flow the same as profit?   While they might seem similar, profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.   Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a construction company owner. It is concerned with the movement of money in and out of a construction company. However, more important, it is concerned with the times at which the movement of the money takes place.   In theory, even profitable construction companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your construction company.   Example: If your retail construction company bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. However, what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your construction company may show a profit, but what about the bills it has to pay during those six months? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.   Analyzing Your Construction Company Cash Flow
The sooner you learn how to manage your cash flow, the better your chances for survival. Furthermore, you will be able to protect your company's short-term reputation as well as position it for long-term success.   The first step toward taking control of your company's cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your construction company. Narrowing, or even closing, these gaps is the key to cash flow management.   Some of the more critical components to examine are:   Accounts receivable   Represent sales that have not been collected. An account receivable is created when you sell something to a customer in return for his or her promise to pay at a later date. The longer it takes your customers to pay, the more negative the effect on your cash flow. This is why you should always get Job Deposits.   Credit Terms   The time limits you set for your customers' promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly. One right way to do that is to accept all major credit cards, including American Express.   Credit Policy   Part of your Contractor Business Plan and the blueprint you use when deciding to extend credit to a customer. Your credit policy needs to be neither too strict nor too generous to allow for healthy cash flow.   Inventory   The excess materials or supplies your construction company keeps on hand to meet your customer's needs. Excess inventory can severely cripple your cash flow by using money that put to better use elsewhere. Too many construction company owners buy inventory thinking it will save time going to the supply house instead of keeping only what they need for each day. Keep your inventory as low as possible.   Accounts payable and cash flow   Amount you owe to your suppliers and needs to be paid at some point shortly - "near" meaning 30 to 90 days. Without payables and trade credit, you would have to pay for all goods and services at the time you purchase them. For optimum cash flow management, examine your payables schedule, and in some cases, you may be able to earn 36% Return On Investment from your accounts payable.   Some cash flow gaps are intentional. For example, a construction company may purchase extra inventory to take advantage of low prices in precious metals like steel, aluminum, and copper, quantity discounts, take advantage of significant trade discounts, or spend extra cash on growing the company.   Some construction companies have cash flow gaps that cannot be avoided. A construction company that works primarily in the outdoors experiences seasonal fluctuations in the winter. These construction companies may have cash flow gaps during slow seasons and then later fill the gaps with cash surpluses during peak seasons. Cash flow gaps can be managed with external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.   In conclusion:   Monitoring and managing your cash flow is essential for the vitality of your construction company. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a future problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your construction company have the potential to cause cash flow gaps.

About The Author:

Randal DeHart, PMP, QPA is the co-founder of Business Consulting And Accounting in Lynnwood Washington. He is the leading expert in outsourced construction bookkeeping and accounting services for small construction companies across the USA. He is experienced as a Contractor, Project Management Professional, Construction Accountant, Intuit ProAdvisor, and QuickBooks For Contractors Expert. This combination of experience and skill sets provides a unique perspective which allows him to see the world through the eyes of a contractor, Project Manager, Accountant and Construction Accountant. This quadruple understanding is what sets him apart from other Intuit ProAdvisors and accountants to the benefit of all of the construction contractors he serves across the USA. Visit http://www.fasteasyaccounting.com/randal-dehart/ to learn more.

Our Co-Founder Randal DeHart - Is a Certified PMP (Project Management Professional) with several years of construction project management experience. His expertise is construction accounting systems engineering and process development. His exhaustive study of several leading experts including the work of Dr. W. Edward Deming, Michael Gerber, Walter A. Shewhart, James Lewis and dozens of others was the foundation upon which our Construction Bookkeeping System is based and continues to evolve and improve. Check out our Contractor Success Map Podcast on iTunes. 

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