Cash is a sub-specialty trade contractor’s most valuable asset. As CFMs, we learn this early in our careers and spend much of our time protecting it. Now, during these unprecedented times, our cash flow becomes even more important. “Cash is King” and “Contractors go out of business for lack of cash” may be cliché, but phrases usually become clichés because they are true. This article will remind us of good cash flow practices while we negotiate these unusual times.

Cash as a Tool

First – and most important – are the basics: use your cash as a tool for success. Spend money to invest in your company’s future while avoiding spending it to service debt. Pay your bills on time, always take early pay discounts, and treat your vendors as you would a customer. Establishing a good relationship with vendors by paying on time benefits your company in better pricing, delivery, and all-around customer service.

And for your customers (GCs) keep in mind that you are part of a team delivering a product to the owner. Keeping eyes on receivables keeps a healthy cash balance, but an open dialog with your customer team helps ensure that open receivables seldom become a problem. If there is an issue you have a built-in line of communication – beginning with your PM – and if payment is being held up because of a performance issue it can be fixed at the operations end. If that does not solve the problem, use your CFMA contacts to help. One of the many perks of CFMA membership is getting to know the CFMs.

Subcontracts

An often-overlooked cash flow tool is your subcontract. A careful review of the agreement is sometimes the best thing a subcontractor can do to improve their cash balance. Some clauses that can be adjusted in your favor include pay if paid to pay when paid, reduction of retention, billing & lien deadlines, stored material billing requirements, insurance requirements, and other document timelines. Be sure that if the GC is a repeat customer their contract is always reviewed. I have seen instances when the “standard” contract has been changed without alerting the sub. And always request a copy of the owner’s contract, as their terms are generally included in yours. Additionally, if your state has prompt pay laws in place, learn the requirements and make sure your customer is following them and has them included in your subcontract if required by your state’s laws.

Organization

Most important never give your customer an excuse to not pay you. That means getting all of your construction documents complete and turned in on time. From your submittals, insurance certificates, schedule of values, and a reviewed, signed  contract. Submit billings and lien releases in a timely fashion, to the correct person, and follow up that the billing is accepted without any changes. Work with your project managers (PMs) to keep the schedule of values (SOV) as simple as possible. This is not only an excellent cash flow practice but keeps the billing process as uncomplicated as possible. A good recommendation is to start simply, and then only add more detail as can be negotiated. To ensure that all project requirements are met, prepare a standard project kick-off Sheet or a standard job file on your network where all the boxes can be checked as items are completed.

Banker Relationships

For Internal cash flow processes, keeping communication lines open and using your banker as a part of your financial team ensures a good relationship. When that rainy day comes you have a trustworthy partner to work with. Establish a sufficient credit line for the size of your company and if possible, keep the balance low; negotiate reward credit card accounts for executives and employees as needed and pay them in full each month. Also establish a sound investment policy with a firm you trust and get references from business contacts if necessary. Take advantage of all of the recent technological advances in banking like direct deposit, ACH payment and receipts, and positive pay. There are several software applications that help facilitate a safe and user-friendly banking relationship.

Accounting Software

There is no perfect accounting software for every construction company, all need some personalization. It is up to you to do your homework and find the best solution for your firm and budget. It is highly recommended to employ a consultant that is familiar with your company and software firms that might be a good fit.

Internal Controls

Of course, internal controls on cash are of utmost importance, no matter the size of your company.  With a larger company, cash duties can be split up into numerous accounting personnel. Unfortunately, it is not so easy with the smaller company. In ours, our President keeps a close eye on the bank balance, signs the accounts payable checks, and we discuss together any questionable bank checks or credit card charges. In accounting we continually check each other’s work and approve journal entries and bank reconciliations.

Risk Management & Safety

Risk management and safety is often overlooked. A misstep can not only hurt cash flow (deductibles, increased premiums) but can cause loss of business and opportunities. And again, the smaller contractors are very susceptible in this particular area, as our company has unfortunately found out more than once. As the NCCI rating is currently calculated, just one indemnity claim can put a firm’s EMR over 1.0 and therefore exclude the company from even the opportunity to bid on a project or with an owner. Putting safety first is not only the best thing for your employees it is also one of the best business strategies you can employ. This is where spending money (cash) is a real investment in your firm’s continued success.

WIP

Of course a rolling cash flow projection is helpful and for some experiencing a cash shortage it can be crucial. Never take for granted that your company will ever have enough cash or assume your current healthy bank balance won’t be depleted by one event beyond your control. Keeping all of the tips above in mind, my favorite cash flow tool is still the WIP schedule. Your projections are not only based on this report, but a weekly (or at least monthly review) can tell you which project or projects are running at a negative cash flow. This is the best way to pinpoint where you might be having a cash crisis, and a pretty good indicator that you have a job that could be in trouble.

Protecting your firm’s cash balance is a complicated and time-consuming process, however it is likely the most important piece of your company’s strategic plan. Remember to take advantage of your CFMA contacts. They have extraordinary knowledge and I have always found them eager to assist, for each individual success helps all of us to succeed.