Construction Cash Flow Forecasting: How Seeing the Full Picture Can Boost Your Profits

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There are many elements to properly tracking and accounting for construction cash flow.

When construction businesses consider how they manage their money, it’s important to keep in mind that construction cash flow is about more than just income and expenses—it’s about all of the ways that you can obtain money, as well as lose it, according to Leslie Shiner of financial consulting firm The Shiner Group.

“Income is very different from cash flow—which is basically what you had to begin with, what you end up with, and what those flows look like,” said Shiner. “And it’s important to note that net income doesn’t always equal [positive] cash flow.”

In the big picture, while contactors make the bulk of their “money-in” from billing against contracts they were awarded as different phases of the project is completed, “money-in” can also include any number of methods, like:

  • Borrowing funds
  • Selling equipment and other assets
  • Acquiring investors
  • Earning investment income
  • Tax credits
  • Grants and other incentives

Likewise, while the bulk of “money-out” typically includes labor, equipment and materials for those contracted projects, other contributors may include:

  • Repaying loans
  • Purchasing assets
  • Paying taxes
  • Profit distributions

“You have to take into account not only the cost of goods and services sold, and your overhead and operating costs—but also considering current loans on equipment, your taxes, and you want to be able to have profit distribution,” said Shiner.

“So cash flow isn’t just income and expenses: It’s all the money in minus all the money out.”

What’s That “Sucking” Noise? The Cash Flow Blackhole

Cash flow "blackholes" are not uncommon among contractors with complex projects and a multitude of financial streams to keep on top of.

Shiner says that a lot of businesses aren’t taking into account every factor when they’re keeping track of their finances, which can lead to illusions of profitability when there may be larger, more foundational problems looming—like the “cash flow blackhole.”

Businesses with cash flow issues can face a vicious cycle in which their money troubles compound on top of one another and vacuum up even more of their funds. Often, businesses that fall into a cash flow blackhole end up facing the same problems:

  1. Businesses aren’t able to take advantage of prompt pay discounts

  2. They can’t negotiate more favorable terms

  3. They’re unable to receive materials if credit holds are placed on their accounts

  4. They’ll often incur additional expenses through interest, finance charges, and penalties

4 Tools to Boost Profits

Shiner recommends taking a few steps to get a clearer forecasting picture—starting with the “money-in/money-out” exercise mentioned above, because projections must include all potential variables to be comprehensive and complete.

The first step to wrangling in your cash flow is to fully review and understand your company's existing financial landscape.

Tip #1: Review your current business cash standing. Largely, this entails taking a look at all of the money you can obtain and all that you are owed, to get a full understanding of your financial position. If you end up in a cash flow crunch, Shiner recommends trying a number of strategies, including:

  • Identifying outstanding receivables and contacting the correct individuals to determine a date for resolution
  • Negotiating the ability to invoice early
  • Invoicing more frequently than each month (if contract terms allow)
  • Taking a look at your lines of credit that are untapped, along with SBA disaster and other loans (including owner loans and credit cards with limit increases)
  • Negotiating flexible terms with suppliers
  • Reviewing lease obligations, pending purchases, and short- and long-term marketing plan
Creating an accurate cash flow projection can help identify priorities and opportunities.

Tip # 2: Create a cash flow projection. This is a five-step process that includes taking a deeper dive into your data:

  • Start with your profit and loss statements from prior years

            —Look at years with similar projected revenue

            —Review data for patterns and trends, and see if they relate to your situation

             —Look for seasonality issues

            —Estimate revenues and expenses using money-in/money-out accounting

            —Create a 12-month projection

  • Look at other cash flow that don’t include profits and losses:

           —Capital purchases such as equipment or vehicles

           —Loan payments or credit line payments

  • Make room in your budget for unusual infrequent payments, like liability insurance and worker’s comp.
  • Know the pattern (schedule) or your cash flows.
  • Tailor this plan to your specific business needs.
An adjusted break-even cash flow forecast can help your company stay on target with its financial goals.

Tip # 3: Create an adjusted break-even cash flow forecast. This is another exercise that businesses should use to understand their basic, foundational monetary situation: profits and losses, separating the cost of goods sold, separating your overhead, and estimating your sales and fixed cost changes. It allows you to take a step back and ask where your business is right now. This exercise will also allow you to adjust your forecast based on the following variables:

  • Do you expect an increase or drop in sales and production volume?
  • Receivables and payables
  • Payroll expense changes
  • Inventory or supply management issues
Knowing the full picture of your financial health will help you avoid unnecessary costs and waste.

Tip #4: Control your cash. Ultimately, this is what you want to be able to do: Have a grasp and understanding of all of the financial tools at your disposal, your “burn rate,” your credit management, and tightening up over- and under-billing. Know when to borrow, and know how to use credit to “float” operating expenses.

Finally, Shiner has some parting advice to help businesses ensure they’re getting everything they can to be successful:

“Make sure you use your discounts. Use credit cards carefully, but to your advantage. Look at ways to borrow money and look at ways to improve your cash—but use the cash you have wisely and avoid getting into that black hole of extra interest and finance charges and late charges. That only makes things worse.”

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Ron is a Content Manager & SEO Strategist for Trimble Viewpoint. A professional writer for more than 10 years, his focus is now on showcasing the benefits of the industry's top connected construction software platform: Trimble Construction One.