Cash Management
Susan Harris

Cash management is a necessity and a key to success for most businesses, but possibly more so in the construction industry. Positive cash flow is needed during each phase of an individual job in order to fund the ongoing materials and labor needed to complete that job.

The process of managing your cash flow should begin in advance of the bidding process. Start with budgeting general and administrative overhead costs and determine your company’s breakeven point. This is also a good time to evaluate those costs; are they necessary and reasonable? These overhead costs become an informative tool for those estimating costs and bidding on jobs.

Once a job has been secured, the contractor should review the cash flow projection of the job; that is, the cash receipts and disbursements on the contracted job. Receipts typically consist of billings less retentions, potential change orders, and retentions when they become available prior to job completion. Disbursements typically consist of bidding and pre-construction costs, labor, materials, supplies, subcontractors, and overhead. After reviewing these items, a cash flow analysis should be prepared. This analysis will not prevent cash flow problems, but will alert management to any anticipated cash flow shortages.

Let’s look at several ways to improve a company’s cash flow.

Billings – The terms of the contract should allow a billing schedule that coincides with the time schedule of the job specifications and the need for materials. You could utilize a billing technique called “front-end loading”. This technique assigns a higher markup during the earlier stages of the job and the contractor takes lower or negative margins in the later stages. This allows a contractor to finance the project using the customers’ money. However, caution is needed so that you are not using the funds on one job to cover losses on another job.

Collections – Billings are futile if you are not collecting what you’ve billed. An individual within the organization should be assigned the task of reviewing accounts receivable balances and making the necessary contacts when amounts are past due.

Under/Over Billings – The review of underbillings and overbillings may bring to light projects that should be handled immediately before they get out of hand. Good contractors will generally have net overbillings. However, this net overbilling is only a good sign if that money is in the bank or waiting to be collected as part of accounts receivable. Significant underbillings are a strong sign of poor cash management as the contractor is financing the project.

The above practices should improve cash flow, as the best source for cash comes from profitable jobs. It is important to remember that the future cash needs may be the next job and management should be careful not to exploit or squander current profits. If contractors find themselves with a cash flow problem they should pursue other sources, which are discussed below.

Personal Resources – Loans or additional equity contributions from the owner. These types of funds can often be obtained more quickly and at a lower cost; such as from personal savings accounts, lines of credit, home equity loans, or loans on cash value of life insurance policies. There is a disadvantage to the owner in that they give up the personal security of those funds being available for a future personal emergency.

Partners or Shareholders – Existing partners or shareholders may be able to make additional equity contributions or loans.

Outside Financing –The owner could look at obtaining a line of credit from their bank, finance new equipment purchases, or evaluate a lease versus outright equipment purchase. Other alternatives are factoring receivables and long-term financing, although these two alternatives are not particularly favorable or easy to obtain.

If you find your company needing additional sources of cash flow, contact your CPA and let them help you in the process of evaluating your cash flow needs and the best available source for those funds. The bottom line is that cash management is not about having a large amount of cash on hand at the end of the year, it is a process of making the contractor, even profitable ones, more successful.



Susan Harris is a CPA and a tax manager at Pickens Snodgrass Koch LLP (PSK). Susan has over 30 years of public accounting experience and works with various types of construction and manufacturing companies. PSK is an accounting firm that provides a variety of audit and tax services to companies located throughout Texas. 1-800-424-5790 www.pskcpa.com