Surety Bond Education

Cash-Flow In Your Construction Business

When you are out of cash, you are out of business.

Cash-Flow in your Construction Business – Why positive cash-flow is the lifeblood of your business

A contractor should be reviewing their financials monthly or quarterly to evaluate the performance of the company. It is easy to take a quick look at the profit & loss report, see a positive profit and give yourself high marks. But the reality is, you cannot use profits to pay your bills, you can only pay for things with cash. This makes the cash-flow statement the most important report to understand how and when those profits are turned into spendable cash.

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There are 3 different classifications of how cash is generated or used in a business:

  1. Operating
  2. Investing
  3. Financing

In terms of evaluating the health of your business, Operating cash-flow is the most important of the three. This is how we can measure a business’s ability to convert profits into cash.

The key to maintaining positive operating cash-flow is not becoming the ‘bank’ for those you do business with. This means you are proactive in managing and planning the timing of billing your customers and bringing in that cash vs paying your bills and expenses. If you are paying labor, material, and overhead expenses relating to a project before you are billing and converting receivables to cash, you are essentially financing the project for the owner, or acting like the bank.

There are five levers in operating cash-flow. The first two are seen in the profit & loss statement and the last three are seen in the balance sheet.

  1. Increase revenue
  2. Decrease expenses
  3. Reduce the time it takes to convert receivables to cash
  4. Reduce the time it takes to sell or use inventory
  5. Increase the time you take to pay your bills

Growth alone puts a strain on cash, and it is always advisable to maintain a conservative approach to overhead and discretionary expenses.  So that leaves the balance sheet driven factors to analyze and manage.

  1. Establish a consistent billing procedure to ensure you are submitting your billings in an accurate and timely manner. Simply, if you do not bill, you won’t get paid.
  2. Negotiate payment terms with your vendors and subcontractors. To win your business, some vendors may be willing to provide favorable terms. Neutral cash-flow would be collecting your accounts receivable and paying your bills at the same time. Any ability to bring in cash faster than it goes out creates a positive ‘float’ environment in your favor.
  3. Close out projects in a timely manner and bill retention. Punch list items can drag on for months and thus not allowing for final completion and billing retention.

In terms of obtaining surety credit, a surety company will want you to be able to demonstrate good cash-flow management.  Especially if you are growing your company rapidly.  And have a desire to also grow your surety program rapidly.

We are here to help you navigate these complexities.  Please reach out to Eric Schmalz or Nicole Schmalz with any questions.  Call us at 512-640-6444.

Internal Resources:

How Do I Increase My Bonding Capacity?

External Resources:

Capital Management 

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