Construction company cash flow is the movement of money in and
out of your contracting business; these movements are known in
accounting circles as inflow and outflow.
Inflows for your construction company primarily come from the
sale of goods or services to your customers, but keep in mind that
inflow only occurs when you make a cash sale or collect on
receivables. Cash is king! Other examples of cash inflows are
borrowed funds, income derived from sales of assets, and investment
income from interest.
Outflows for your construction company are generally the
result of paying labor, material, other direct and indirect costs
of goods sold and overhead expenses.
Is cash flow the same as profit?
While they might seem similar, profit and cash flow are two
entirely different concepts, each with entirely different results.
The concept of profit is somewhat broad and only looks at income
and expenses over a certain period, say a fiscal quarter. Profit is
a useful figure for calculating your taxes and reporting to the
IRS.
Cash flow, on the other hand, is a more dynamic tool focusing
on the day-to-day operations of a construction company owner. It is
concerned with the movement of money in and out of a construction
company. However, more important, it is concerned with the times at
which the movement of the money takes place.
In theory, even profitable construction companies can go
bankrupt. It would take a lot of negligence and total disregard for
cash flow, but it is possible. Consider how the difference between
profit and cash flow relate to your construction company.
Example: If your retail construction company bought a $1,000
item and turned around to sell it for $2,000, then you have made a
$1,000 profit. However, what if the buyer of the item is slow to
pay his or her bill, and six months pass before you collect on the
account? Your construction company may show a profit, but what
about the bills it has to pay during those six months? You may not
have the cash to pay the bills despite the profits you earned on
the sale. Furthermore, this cash flow gap may cause you to miss
other profit opportunities, damage your credit rating, and force
you to take out loans and create debt. If this mistake is repeated
enough times, you may go bankrupt.
Analyzing Your Construction Company Cash
Flow
The sooner you learn how to manage your
cash flow, the better your chances for survival. Furthermore, you
will be able to protect your company's short-term reputation as
well as position it for long-term success.
The first step toward taking control of your company's cash
flow is to analyze the components that affect the timing of your
cash inflows and outflows. A thorough analysis of these components
will reveal problem areas that lead to cash flow gaps in your
construction company. Narrowing, or even closing, these gaps is the
key to cash flow management.
Some of the more critical components to examine are:
Accounts receivable
Represent sales that have not been collected. An account
receivable is created when you sell something to a customer in
return for his or her promise to pay at a later date. The longer it
takes your customers to pay, the more negative the effect on your
cash flow. This is why you should always get Job Deposits.
Credit Terms
The time limits you set for your customers' promise to pay for
their purchases. Credit terms affect the timing of your cash
inflows. A simple way to improve cash flow is to get customers to
pay their bills more quickly. One right way to do that is to accept
all major credit cards, including American Express.
Credit Policy
Part of your Contractor Business Plan and the blueprint you
use when deciding to extend credit to a customer. Your credit
policy needs to be neither too strict nor too generous to allow for
healthy cash flow.
Inventory
The excess materials or supplies your construction company
keeps on hand to meet your customer's needs. Excess inventory can
severely cripple your cash flow by using money that put to better
use elsewhere. Too many construction company owners buy inventory
thinking it will save time going to the supply house instead of
keeping only what they need for each day. Keep your inventory as
low as possible.
Accounts payable and cash flow
Amount you owe to your suppliers and needs to be paid at some
point shortly - "near" meaning 30 to 90 days. Without payables and
trade credit, you would have to pay for all goods and services at
the time you purchase them. For optimum cash flow management,
examine your payables schedule, and in some cases, you may be able
to earn 36% Return On Investment from your accounts payable.
Some cash flow gaps are intentional. For example, a
construction company may purchase extra inventory to take advantage
of low prices in precious metals like steel, aluminum, and copper,
quantity discounts, take advantage of significant trade discounts,
or spend extra cash on growing the company.
Some construction companies have cash flow gaps that cannot be
avoided. A construction company that works primarily in the
outdoors experiences seasonal fluctuations in the winter. These
construction companies may have cash flow gaps during slow seasons
and then later fill the gaps with cash surpluses during peak
seasons. Cash flow gaps can be managed with external financing
sources. Revolving lines of credit, bank loans, and trade credit
are just a few of the external financing options available that you
may want to discuss with us.
In conclusion:
Monitoring and managing your cash flow is essential for the
vitality of your construction company. The first signs of financial
woe appear in your cash flow statement, giving you time to
recognize a future problem and plan a strategy to deal with it.
Furthermore, with periodic cash flow analysis, you can head off
those unpleasant financial glitches by recognizing which aspects of
your construction company have the potential to cause cash flow
gaps.
About The Author:
Randal DeHart, PMP, QPA is the
co-founder of Business Consulting And Accounting in Lynnwood
Washington. He is the leading expert in outsourced construction
bookkeeping and accounting services for small construction
companies across the USA. He is experienced as a Contractor,
Project Management Professional, Construction Accountant, Intuit
ProAdvisor, and QuickBooks For Contractors Expert. This combination
of experience and skill sets provides a unique perspective
which allows him to see the world through the eyes of a contractor,
Project Manager, Accountant and Construction Accountant. This
quadruple understanding is what sets him apart from other Intuit
ProAdvisors and accountants to the benefit of all of the
construction contractors he serves across the USA.
Visit http://www.fasteasyaccounting.com/randal-dehart/ to
learn more.
Our Co-Founder Randal
DeHart - Is a Certified PMP (Project Management
Professional) with several years of construction project management
experience. His expertise is construction accounting systems
engineering and process development. His exhaustive study of
several leading experts including the work of Dr. W. Edward Deming,
Michael Gerber, Walter A. Shewhart, James Lewis and dozens of
others was the foundation upon which our Construction Bookkeeping
System is based and continues to evolve and
improve. Check out our Contractor Success Map Podcast on
iTunes.
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