ABC - Cash Flow: The Lifeblood of a Contractor

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CASH FLOW: THE LIFEBLOOD OF A CONTRACTOR (05/19/2011)

By Paul Esche, Construction Executive Magazine

Increased competition, tight margins and less available work has forced contractors to make tough decisions, several of which revolve around the need for cash flow. Contractors already face cash flow issues based on the nature of the business. Many contractors can bill only for work performed on a monthly basis; however, they have weekly payroll costs, administrative costs and other cash outflows with tighter time frames. Additionally, retainage typically withholds 10 percent of each billing until substantial completion.

Contractors can implement several practices to improve their cash position.

Track collections. As a best practice, supervisors and project managers should regularly follow up on collections for their respective jobs. Consider implementing incentives for quick collection on projects.
Enforce timely billing. Contractors should bill for all work performed in each billing cycle within the terms of the contract. To do so, project managers and supervisors must know all costs incurred within the billing cycle regardless of whether those costs have been invoiced.
Take advantage of over-billings. When contractors anticipate all costs associated with their projects, they put themselves in a position to stay over-billed from month to month and increase their cash position.
Forecast cash flow. Contractors should have a cash flow forecast for each project in progress. These forecasts should be updated on a weekly basis throughout the life of the contract to help the project remain in an over-billed status and allow the project manager to keep a closer eye on the cash position of each project at all times.
Stretch out payables. Contractors should work to take advantage of any discounts available on material purchases; however, they also should refrain from paying invoices to suppliers or subcontractors before the due date. Even a few days in each pay cycle can reduce the interest expense or increase investment income significantly.
Evaluate potential purchases. Evaluate the capital budget to determine if the projected capital purchases are still necessary. If purchases can be pushed back to the following year’s budget, it will increase cash flow for the current year.
Evaluate the best use of cash. Review cash accounts and determine if funds are allocated effectively. Evaluate money tied up in investments, potential interest income and the advantages of using a sweep account.
Negotiate retainage. Work to decrease retainage held or push for early release of retainage during contract negotiation. This is more effective during negotiations with clients with a history of great relationships.

As all contractors know, the construction industry operates in a very cyclical environment. During certain cycles, such as the current one, cash flow becomes even more important to everyday survival. Evaluating current cash flow and looking to implement best practices can be the ticket to success.