Jun 5, 2020
This Podcast Is Episode Number 0370, And It's About How Cash Flow Forecasts Help Contractors
Managing cash flow is a vital part of running a successful
construction business. Some contractors think managing cash flow
means keeping track of how much money enters and leaves their
business, but there's actually more that goes into it.
[Starting Cash + Cash In - Cash Out] = Cash Flow
Contractors and sub-contractors know there is more to profits
than what is shown above, and most of you rely on your "gut feel"
to see when the project has made a profit or not.
Cash flow forecasting is an incredibly valuable tool that
helps you anticipate cash flow issues, plan for days when your cash
flow is limited, and show the bank that you are prepared.
It's a necessary process that you
shouldn't ignore.
Here are some ways cash flow forecasts help construction business owners.
They help identify cash flow issues before they happen.Most construction companies go through slow periods.
Sometimes, those periods are apparent. A seasonal trade business,
for example, will have decreased income during the off-season than
during the on-season.
There can be less obvious peaks and valleys in your income,
though you have to prepare for it.
Your cash flow forecast can help you monitor your day-to-day
cash flow and anticipate when times will be slow before they hit.
By predicting when the cash coming into your business might be
light—or when you might have to spend more than you're accustomed
to—you can avoid a cash crisis.
By examining your cash flow over the previous years and
forecasting your future cash flow, you can better anticipate
financial cycles and how they affect your bottom line.
They help plan for tougher times.
It's tempting to spend money when you have a lot coming in.
Your construction business may need new equipment, or maybe you
want to give all your employees a raise or a bonus.
That's a great thing to do, but it's only helpful if it
doesn't jeopardize your business financially.
Cash flow forecasting is an excellent reminder about how your
bank accounts will look during tougher times, so you can make
important decisions about when to spend your money and when to save
it.
If you know a slow period is coming up, it might be better to
save your money for now and give out smaller bonuses. If you can
anticipate your slow period, you can plan major purchases and bill
payments to stretch your cash further.
At least by conducting cash flow forecasts, you're less likely
to be surprised by a sudden cash-flow crisis.
They show banks you can
plan.
Banks prefer to give their money to entrepreneurs who show
they are capable of planning. Financial institutions prefer
business owners who are realistic with their financial projections
and show they have a means of addressing cash flow
issues.
Final thoughts
Forecasting your cash flow gives you a clearer picture overall
about your construction business and how the money moves into and
out of it. It provides essential insight into your company's
financial health.
If you haven't conducted cash flow forecasting so far, it's
good to get started now, so you have a better understanding of your
company's finances and prepare for the future.
Want help to improve your cash-flow? Contact us today.
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