While most businesses appreciate and understand the need to manage cash inflows and outflows, this concept is more complex than just ensuring that the cash collected is more than the cash paid out.

In CFMA’s 2018 Construction Financial Benchmarker, the average number of days in accounts receivable (A/R) was 54 for the 2017 fiscal year. The Benchmarker’s Specialty Trade participants (into which most subcontractors typically fall) projected 15.1 days of cash on hand, which is about five days fewer than the ratio for all companies surveyed. Similarly, the average number of days in A/R for Specialty Trade contractors was about five days greater than the ratio for all companies surveyed. This makes sense – when it takes five more days to collect on receivables, the days of cash will be about five days fewer due to the delay in collections.

Generally, subcontractors are one of the furthest down the payment chain on a project and typically aren’t going to get paid until the GC is paid by the owner. This creates working capital challenges in a robust construction market; as volumes increase, more cash stress is placed on subcontractors. The delay of cash receipts can be exacerbated by disputes between the owner and GC as well, which is why it is important to have a good understanding of the contract terms and the various parties involved.

Subcontractors can be the most sensitive to changes in the market or on a specific job because they’re furthest away from the payment cycle. However, there are multiple areas subcontractors should address to help improve their cash flow such as a robust forecasting model, understanding the payment terms of the contract and the parties involved, identification of KPIs relevant to cash management, and leveraging your existing relationships.

Implement Forecasting

When the economy is robust and there’s available work, many contractors put their heads down and focus on the tasks at hand. It can be difficult to devote time and resources to longer-term planning and have the courage to walk away from higher-risk, low-margin jobs. However, there is a need to develop a more robust forecasting methodology along with an account review.