0416: If My Construction Business Is Making A Profit Where Is The Cash

This Podcast Is Episode Number 416, And It's About If My Construction Business Is Making A Profit Where Is The Cash Some construction business owners find themselves in the difficult position of running a business that appears to be profitable but still having no money in the bank. It's a critical situation to address. After all, a lack of adequate cash flow is one of the leading causes of small construction business failure.    Here are three reasons why profitable construction businesses have little money in the bank and what company owners can do to handle these tricky situations. 

1. Using business money for personal reasons

Owners may be using their business bank account as a personal bank account, withdrawing the money as they see fit. Of course, business owners need to earn a living. Instead of using the business account as a personal account, you should give yourself a wage and transfer that from the business account to your personal account at set intervals. If your personal money runs out, you can't go back to the business account for more money until your next withdrawal date. 

Regular use of the business account, even for relatively small amounts, adds up and can have a drastic effect on your business's cash flow. 

 2. Not collecting payments

Construction businesses need to make money, and they do so when customers pay their bills. Not sending out invoices promptly, not following up when customers fail to pay, and not conducting adequate credit checks on customers all put cash flow in jeopardy. 

It's best for contractors like you to send out invoices with clear payment terms and follow up immediately if customers violate those. You can also put procedures in place to avoid customers who are unlikely to pay for work done or mitigate the damage if clients attempt to get away without paying. Requiring deposits, for example, are a great way to manage both cash flow and customers. 

When doing a construction project, do not be a banker! Invoice early and often and get change orders signed.

There Is A Hall Of Justice, But There Is No Hall Of Fairness

No law says there have to be change orders. A lawyer may enforce a verbal contract; however, for contractors, unless you have something in writing, it is my opinion that construction contracts are fixed in stone. If a deal states, "I will pay you $X to do Y scope of work," your customer cannot force you to do more, and you cannot do less than agreed.

Change orders can protect you and your client. Change orders give contractors leverage because you can refuse to make the change unless you are paid.

3. Not preparing for tax season

Many small construction business owners see taxes as something they can worry about later. Then tax season rolls around, and they don't have enough money set aside to pay the collector. In some cases, a construction business may have suddenly had a significant profit increase but have not increased the amount set aside for taxes. 

Treat your taxes as a regular expense. Set money aside each month to pay taxes. Suppose there is a drastic increase in profits, set aside even more money. Being prepared is far better than being caught with too little. 

Final thoughts

There are steps you, as a construction business owner, can take to ensure that your business makes a profit and has money in the bank. First, you should learn how to read and understand your balance sheet and Key Performance Indicators (KPIs). These show how much money is coming in and where it's going. It also highlights which customers aren't paying their bills. 

Contractors should also avoid using the business bank account for personal expenses. Instead, you should pull a set amount of funds to your personal account and limit your personal expenses to that amount.

Finally, you must understand your liabilities. Liabilities affect how much cash is available for your business, and even minor penalties add up quickly. Know how much is owed, how much is paid monthly and when those bills are due. 

By keeping track of the money coming into your construction business, where it goes, and when it leaves, you can get a better handle on ensuring your business not only makes a profit but has money in the bank.  

Got a question? Let's talk.

About The Author:

Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on how to manage the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com