The Construction Accountant: How to Grow with your Cash Flow

Grow your Construction Company within your Cash Flow Means (Under Construction) 

Maybe your situation isn’t as easy as the one described in Ideal Construction Cash Flow System for Growth. You may be a sub-contractor on a small part of a project or part of a larger project with standard contract language. You, as a small contractor, must be careful not to fall into the cycle of cash hell. 

The Cycle of Cash Hell (a short story) 

Mike’s Construction Business has been around for 3 years now. He specializes in medium, multi-day jobs at single-family homes. Word got around that Mike does great work, and he started getting calls for more and more work.

Mike’s small business has grown to three crews, and he recently hired an estimator so that Mike could continue to supervise the jobs, which were really starting to pile up. As is the case for many construction business owners, it seemed like Mike was always running from one job to another, filling in for employees who didn’t show up, or running out for supplies or equipment to keep the jobs running. 

Mike’s three crews usually have two or three jobs in various states of progress, so there are usually around fifteen projects started at any one time. Mike’s customers pay a small deposit upfront to cover initial material costs when they sign the estimate, and then the balance of the project is invoiced when Mike’s crew finishes the job.

Mike’s best crew is one week away from finishing their work on a new deck and backyard hardscape job several miles out of town, when another customer calls and complains to Mike that his back deck and outdoor grilling area were started two weeks ago, but no one has been out since. The customer is angry, almost enraged, so Mike sends his best crew over to show quick, short-term progress on the deck and to keep the customer happy. 

Mike pays his employees every two weeks, so he checks his bank account on Tuesday to make sure he has enough liquidity to cover payroll this Friday. Even though Mike is busy, his payroll bill always cuts it close.

Once again, Mike’s cash flow forecast will be several thousand dollars short of hitting payroll. Mike has a line of credit, but he likes to keep the company’s cash on hand for emergencies, and he’s already used a good portion of it to cover past payroll and other unforeseen expenditures, so he calls his estimator and asks him to get at least $10k in construction project deposits from new work to cover the payroll for Friday. Mike knows that it will all eventually work out, because he’ll finish the hardscape job and have positive cash flow from that job, and several other jobs will close in a short period of time, but it’s so hard to keep all the customers happy. Unfortunately, that’s just the nature of the construction industry. 

Construction Cash Flow Problems

Mike doesn’t realize that he’s in the cycle of cash hell. He’s chasing cash by getting deposits payable to start new work instead of taking time to finish the work that’s already started. His cash flow management system is making his existing negative cash flow problem worse.

It’s not Mike’s fault. It’s virtually impossible to keep a crew on one job until it’s complete because the jobs take too long, and Mike needs working capital to pay for payroll before the job is done and invoiced. There are always customers who are upset and want their project started (or finished). The only way he can think to keep growing is to keep juggling as many jobs as he can to keep what cash he can be flowing in to cover critical expenses. 

Mike is in a dangerous situation. As he starts more and more jobs to get deposits to cover cash outflows for existing jobs, Mike can easily over-extend his crews and start to get a reputation for not finishing on time. Mike spends more time on the phone dealing with customers asking for the status of their job than he does working. 

Mike has a few options: 

• Collect higher deposits up front to cover more of the labor and improve cash flow
• Insist on progress payment terms for customers with projects that take longer than a pay cycle (to stay ahead of payroll) 
• Bookkeeping with a CPA who can project cash flow so you can take on work accordingly 

Solve cash flow issues by converting to a completed work payment schedule (instead of deposits) has many benefits: 

• Moving your crews around wastes precious time and equipment utilization 

• Every time you finish a job, that’s one less customer to call and ask for a status update 
• Your company has gained a reputation for finishing work on schedule 

We have seen a practice in the construction industry where contractors run low on cash flow, so they send out an estimator to bid on new jobs, collect deposits, and use the money to pay wages, subs, and material costs for in-progress work.

The bottom line is that without an accounting system to complete a cash flow analysis to track profitability, busy contractors doing a lot of work and taking in a lot of money might be working themselves into bankruptcy.

Collecting deposits to pay for in-progress work instead of starting new work also leads to angry customers and a cycle of moving employees and equipment from job site to job site, trying to make the angriest people happy. Moving around and switching projects adds more inefficiency and wasted time into the equation, and the problem continues to grow. And late payments in his accounts receivable column could mean disaster.

Mike was getting burnt and stressed out, so he worked with his accountant to devise a change order for his own financing activities. 

Early Payment Solutions

Mike was hesitant, but he finally agreed to experiment with asking for larger deposits up front and progress payments once a week throughout longer projects. Not all of Mike’s customers were willing to pay larger deposits and make progress payments, but Mike was surprised by how many had no issue with the arrangement. Cash flow statements started to look a little better, and hitting payroll was a little less stressful. 

Finish Before Starting 

When Mike’s customers’ payment options switched to larger deposits and progress payments, he could keep his crews at one job site until the work was complete. Mike was able to bill for completed work much earlier than before, and his balance sheet was balanced. He also spent a lot less time on the phone calming upset customers by asking when their projects would be finished. 

Project Cash Flow 

Mike still had large jobs some for other contractors, that didn’t pay larger deposits or pay progress payments, so Mike still had to be careful to set aside enough cash to pay for labor and materials until the job was finished and the final bill paid.

Mike’s accountant used accounting software to create financial statements that showed expected cash inflows and outflows over the course of the next twelve weeks. Mike had a pretty good idea of his costs for each of the upcoming jobs.

Together with his accountant, Mike now had tighter financial management. He predicted when his cash would run dry and how long it would stay dry. With this information, Mike felt confident to use the line of credit to cover the low cash period, and then replenish it with subsequent cash in-flows.

Mike’s finances have improved, his job costing is clearer, his project management is tighter, and he’s looking at adding a fourth crew. Because Mike is forecasting his cash flow, he has a pretty good idea of how much he needs to ask the bank to increase his credit line to make it possible. 

Summary 

Mike’s Construction started small, grew quickly through hard work and attention to detail, and then grew too much and almost imploded.

Mike adjusted the methods he used to run his business, and now he’s growing strategically. Mike takes on only the work that fits his cash flow capabilities. Because Mike’s crews stay at one job site until it’s finished, his reputation has improved. There are still times when his crews juggle multiple jobs, but it’s no longer the status quo. Mike’s phone conversations with his customers are usually positive, and it’s unusual for Mike to get a call from a client upset about work not moving forward as promised.