The first rule in both baseball and golf is keep your eye on the ball. The best hitters in baseball say they can sometimes actually see the ball hit the bat. Ben Hogan, one of golf’s greatest, claimed that the visual image that stayed with him after he hit a ball was the empty spot on the turf where the ball had been a split second before. To Hogan, this was proof that he had kept his head down and witnessed the club hitting the ball. 

Tracking

One of the primary jobs of construction company CFOs is to keep an eye on cash as it flows into and out of the corporate accounts which is tracking the flow of cash in real time, not planning for the future nor reporting on past activities. In the sport of construction it is critical to keep your eye on the cash flow ball to ensure that the corporation always has enough cash to keep going. Cash flow tracking is not an accounting statement, budget, or business plan. It is real time tracking of the minutiae of cash flow from various sources to multiple uses. I call it a “Flash Cash Report”.

Flash Cash Report

During the years when I was completing jobs for sureties, most of the contractors that failed mid-job were surprised that they ran out of cash. What was shocking was that they were surprised. These recurring failures resulted in the development of the flash cash report--calculations utilizing the following cash flow variables: 

1. Cash balances in multiple corporate accounts.
2. Total current payroll due within the next 30 days.
3. Total accounts payable due within 30 days.
4. Accounts payable checks issued but still outstanding.
5. Invoices receivable payable within next 30 days.
6. Receivables due as agreed but as yet unpaid (overdue).
7. Receivables in dispute.
8. Total unused balances of working capital lines of credit.
9. Overhead expenses payable within 30 days.
10. Subcontractor/vendor payments due and payable within 30 days

These provide an estimate of the cash available for ongoing operations.

Meaningful Metrics

To some, the 30-day period covered may seem too long to be effective, however that depends on the size and complexity of the company. Large, complex, firms with multiple jobs going at the same time might need a weekly flash cash report.

The point is that working capital capacity is an ever-changing fluid metric. All construction CFOs should be keeping their eye on cash flow continually. Contractors that suddenly went out of business were unaware that they were about to run out of cash because no one had their eye on the cash flow ball

Cash Flow Profile

HISTORY:

• It doesn’t take a CPA to know that “cash available for ongoing operations” better be a positive number. How big a number depends on the historic cash needs of each individual organization and the cash flow profile of impending projects.
• During the research that discovered the causes of contractor failure I reverse engineered cash available for hundreds of construction companies going back at least five years to be sure I was using a meaningful sample. CFOs should be similarly assessing their firm’s historic cash needs to determine if they have sufficient cash available to conduct their present business.

PENDING:

• Every new job being considered presents its own unique cash flow profile.
• Different owners handle their accounts payable (your receivables) differently.
• Accounts payable terms may be more generous with certain subs and suppliers.
• Some owners require different amounts of retention.
• The Engineer or architect may be more contentious in withholding payments.
• Your banks may alter their lending standards.

LAYERING:

As jobs progress their cash flow profile is constantly changing. Combining multiple job cash profiles all at different stages of job completion requires a careful layering technique that we will discuss in detail next week. 

Working Capital Line of Credit

Managing working capital requirements for contracting is no easy task. Ultimately, management must partner with their bankers to ensure an adequate supply of working capital is available to complete a wide variety of complex construction projects. The history of failed projects falling into the lap of sureties because of a lack of working capital testifies to the inadequacy of current banker/contractor partnerships. When contractors run out of working capital mid-project, the cause is inadequate financing not inept construction. What our industry needs is a careful study of our financing processes, banking relationships, and a serious effort to find solutions.