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Cash flow: The building blocks


Building a viable, solid construction business is difficult in today’s economy, and cash flow management is more important than ever. The following best practices provide an excellent foundation to your cash management strategy:

Start your business with adequate capitalization. The more equity and ability to access cash, the better. A debt to equity ratio of 2:1 or better is a good target to shoot for. The Best of Class Debt to Equity ratio decreased from 1.9 in 2011 to 1.2 in 2012, according to the CFMA Annual Financial Survey (2013). 

Track collections regularly. Make sure that supervisors and project managers take responsibility and establish a regular schedule for tracking collections, including the timely billing of change orders. Offer incentives for quick collection, and settle billing disputes immediately. Use technology to speed collections by e-mailing invoices, taking ACH payments, and using check scanning devices.

Stay over-billed on jobs. Reduce the time between billing cutoff and the delivery of requisitions. Be sure that you formally establish an internal timetable for cutoff of costs to be billed and invoiced upon delivery. Whenever possible, prioritize the processing and delivery of large-dollar invoices over smaller ones. Build in payment due dates based upon the substantial completion of a project rather than receipt of the invoice. Historically, 5 percent of annual revenue in billings in excess costs is a great target to shoot for best-of-class companies. 

Negotiate retainage. As part of the bidding process, build in the opportunities up-front for a smaller retainage or for early release of held funds. A declining hold-back, such as 10 percent retention until the job is 50 percent complete, 5 percent retention from 51-90 percent complete, and lastly, 2 percent to completion. 

Forecast cash flow. In addition to accelerating your cash inflow, you may also need to slow your cash disbursements by paying large bills later when no early-payment discount is offered, using zero balance accounts, and purchasing materials on a just-in-time basis to minimize inventory levels. Also, consider using an accounts payable system that monitors certificates of insurance before payment is made to vendors or subs.

There are a number of cash flow forecasting models you can use. If this is your first attempt, keep it simple. No matter what model you choose, it’s important to have a strong cash flow management strategy to ensure the long-term stability of your business.

Randall Schulz, CPA, is a Vice President at Harding, Shymanski & Company, P.S.C., Certified Public Accountants and Consultants, a Midwest based regional accounting firm specializing in construction accounting and consulting. For further information, contact Mr. Schulz at rschulz@hsccpa.com, (800) 880-7800, or (502) 584-4142.

Used with permission as a member of the McGladrey Alliance