Jan 22, 2021
This Podcast Is Episode Number 403, And
It's About Cash Flow Management And How To Track
Income
A wise business owner once
said, "Happiness is positive cash flow." As a business owner, I'm
sure you agree. Everything is better when your cash-in exceeds your
cash-out.
A cash crisis can be
emotionally devastating, and it can even kill your business. If
you've ever had to beg, borrow, and steal to cover tomorrow's
payroll, you know what I mean.
Having a proper cash
management system allows you to:
- Know when, where, and how
your cash needs will occur.
- Know what the best sources
are for meeting your additional cash needs.
- Be prepared to meet these
needs when they occur by keeping good relationships with bankers
and other creditors.
The starting point for
avoiding a cash crisis is allowing your accountant to develop a
cash flow projection for you. Your construction accountant can help
you develop both short-term (weekly, monthly) cash flow
projections, help you manage daily cash, and long-term (annual, 3-5
year) cash flow projections to help you develop the necessary
capital strategy to meet your business needs.
Also, a well kept historical cash
flow statements help you understand where all the money went.
Having an accurate cash flow projection has several benefits and
will make many procedures easier for your construction company.
The one burning
question contractors want to know: When is it income?
When money comes into the
business, at some point, it turns into income. "Money goes in and
out of my business, and I don't understand when it is income and
when it is not." Without proper tracking and matching of income and
expenses, most construction companies never know if they made a
profit until the job is over.
The Diagram Below Shows
Five Ways Money Comes In
- Job
Deposit -
Customer signs a contract and gives the contractor a down payment
check - (Not
Income)
- Invoice - Contractor sends the customer an Invoice for the
work done, and the customer
pays - (Income)
- Loans - Contractor, outside investors, banks loan money to
the business - (Not Income)
- Refunds -
Contractor returns unused material, gets money back -
(Not
Income)
- Rebate - Contractor receives a rebate when buying a new truck
- (Not
Income)
The Diagram Below Shows
Five Ways Money Goes Out
- Labor -
Payroll and taxes because contractors can make good money with
qualified labor - (Not Income)
- Material - It takes money to make money, and you need material
to build and repair things
- (Not
Income)
- Other - Costs you need to operate a mobile business like
construction - (Not Income)
- Subcontractors - Do what you do best and outsource the rest
- (Not
Income)
- Overhead - Everything not directly related to fieldwork
- (Not
Income)
The Diagram Below Shows
When It Is Income
- Invoice - The
only time when money coming in is
- (Income)
- Job
Deposit -
Applied to an Invoice, the money is
- (Income)
- Customer
Payments -
Applied to a complex Invoice, it is - (Income)
Our services can provide you:
- Help in obtaining an
appropriate line of credit
- Cash collection acceleration
techniques
- Proven effective collection
policies
- Established effective
payment policies
- Help in getting the maximum
rate of return on your idle cash
Final
thoughts
Cash flow is the lifeblood of any construction company,
especially those with annual sales volume under $1,000,000. Some
construction Company experts even say that healthy cash flow is
more critical than your contracting company's ability to complete
projects. While that might seem counterintuitive, consider this: if
you fail to satisfy a customer and lose that customer, you can
always work harder to please the next customer. If you do not have
enough cash reserves to pay your suppliers, creditors, and make
payroll, then your Construction Company is out of business; game
over!
About The
Author:
Sharie DeHart, QPA is the co-founder of Business
Consulting And Accounting in Lynnwood, Washington. She is the
leading expert in managing outsourced construction bookkeeping and
accounting services companies and cash management accounting for
small construction companies across the USA. She encourages
Contractors and Construction Company Owners to stay current on
their tax obligations and offers insights on how to manage the
remaining cash flow to operate and grow their construction company
sales and profits so they can put more money in the bank. Call
1-800-361-1770 or sharie@fasteasyaccounting.com