In construction, cash is always king. As such, positive cash flow is a prime concern for every construction, development, and real estate enterprise. Owners, investors, and lending institutions evaluate the cash flow of a job, investment, business unit, and company to make decisions.
This article discusses effective cash management and why cash should be at the heart – and in the vision – of almost every decision a company makes.
Initial Steps
The first step in ingraining cash flow management into all recesses of an organization is to map the contract to the cash process to understand the cash impact during each stage of a contract as it moves toward the end of the life cycle within an organization (pre-bid, bid, award, doing the work, and project closeout).
Map the steps, evaluate, improve, and remove redundancy to allow your team to take ownership of each piece, their role, and how they relate to the process. This will take cash flow management from a fuzzy concept to a practical system and help others understand that effective cash management is a continuous cycle of learning, changing, and adapting.
Next, view all processes through the cash flow lens. Teach the entire company and allow everyone to be influencers of positive cash flow. Start with individual employees by beginning every accounting/finance meeting with victories and celebrations (people first), then jump right into cash management:
- Are you billing everything?
- How can you get out in front of the cash collection curve?
- What is your current borrowing base with your bank?
- What do future billings look like?
- What new projects are starting?
When billings on a milestone project are delayed, it creates or exacerbates a cash hole because payroll is paid with no corresponding billing. As you interact with other departments and witness moments when you are unable to bill, take the time to explain the importance of billing and getting paid.
Most cash management in a construction, development, or real estate company is done in the field. The only way to achieve success is if finance works with operations to positively affect cash by assisting operations in the preparation of job cash flow projections, preparing schedules of values, helping plan for the payment of long lead purchases, etc. Over time, your operations team will have the same (or greater) attention to cash flow as your finance team.
There are several important axioms of cash management:
- Maximize and accelerate billings
- Slow payments
- Minimize assets
- Maximize liabilities
- Look for tax minimization strategies
While this article will touch on some of these, the focus is on the philosophy and tools used to ingrain cash flow into the company culture. It is up to each company to define the strategies that make sense and the path that generates the largest ROI.
This article examines two basic cash flow tools: the job cash flow and the short/intermediate cash flow (direct) projection. The third tool, not demonstrated here, is the long-term cash flow (indirect) projection, which is beyond the scope of this article.
The simple strategy of generating cash flow is to:
- Create a culture of cash flow management
- Define effective cash flow management for your organization
- Implement, maintain, and use the correct models for decision-making
- Track the decisions against expected results
Job Cash Flow
In construction, cash flow is largely determined by operations. The largest single line on a contractor’s financial statement is generally the revenue line, which is earned in the field, so it makes sense to start tracking cash flow there.
Job cash flow is determined by many factors including the contract and transfer of risk, the schedule of values, conditions experienced, delays, etc. Everything that affects project profitability affects job cash flow at the job or project level, most of which are negotiated.
At the Job Level
Creating a company culture of cash flow management is the key. The project governance team must understand the importance of project cash flow. This team includes all of the decision-makers on a project and may consist of project managers (PMs), construction managers, project sponsors, project attorneys (in-house or outsourced), general managers, controllers, and CFOs. The project governance team, or at least select members of it, must understand what data is needed and by when to create and update a job cash flow.
How is this done? Cash flow considerations are a part of every interaction between the accounting/finance and the project teams. Select members of the project team – ideally including accounting/finance – are charged with working together to produce a project cash forecast.
That forecast is then jointly presented to the CFO (and perhaps the leadership team) where mitigation strategies are discussed to maximize cash flow, if necessary. This should be done prior to the schedule of values being developed or finalized, otherwise this becomes a reporting exercise instead of a valuable strategic plan. PMs should update the job cash forecast from their perspective at least monthly and large swings, positive or negative, should be reported to the CFO.