Cash Is Everyone's Business

A construction CPA recently told me about a contractor with a rock-star income statement. Every job was profitable, and it was propelling them into bigger and bigger projects as the business continued growing – until they folded. Why? They ran out of cash. Like too many construction companies, they didn’t have a profit problem; they didn’t have a spending problem; but they did have a cash flow problem. And more than likely, they could have prevented it.
 
While a lot of data accounting departments ask the field for might just seem like numbers, cash is where it all meets the road. Without cash, there are no jobs. There’s no gut feeling about whether you’ll be able to make payroll next week. So good cash flow reporting isn’t just crucial for a business to survive its next project – it should be a common goal that puts operations and accounting on the same team. Everybody needs to care about cash flow reporting.
 
THE CURRENCY OF CASH

The case for the importance of cash is simple. Cash is arguably the single resource that contractors can’t survive a week without. If you run out of materials, you can buy more. If you don’t have labor, you can subcontract it. But if you don’t have access to cash as soon as you need it, everything grinds to a halt – labor, production, billable work, etc. When everything stops, there’s no more cash to be made. When contractors fail, that’s often why.
 
WHY CONSTRUCTION HAS A CASH PROBLEM
 
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On paper alone, contractors are vulnerable to cash flow issues. Construction businesses often have a substantial delay between work completed and payment. Depending on the contract, work might be billable periodically or at project milestones or only once the punch list is finished. Even then, payment terms of 30, 60, or 90 days are prevalent, plus retainage. 
 
Of course in practice, the time between performance and collection is even longer. Many companies fail to bill their customers as soon as they’re eligible to do so. Project documents might sit for weeks before invoices are entered and issued, and manual payment processes can eat up time. Customers can also cause collection delays. In a recent survey by TSheets and zlien, 92% of respondents said that timely payment is at least sometimes an issue, and on average, it might take over 70 days for contractors to get paid. “Pay when paid” and contract disputes put subcontractors even further back for cash receipts. 
 
In general, the construction industry naturally has irregular and sometimes unpredictable cash cycles. Even with a steady backlog, receipts aren’t spread evenly across a project. Costs are often taken on up front, with the bulk of collections occurring much later. Depending on how payments and receipts are stacked, even a portfolio of profitable jobs can sink an otherwise successful contractor.
 
WHAT YOUR FINANCIALS (DON’T) TELL YOU
 
To keep an eye on cash, construction businesses need more than just a balance sheet and income statement. In government, three branches provide checks and balances for each other; in construction, a three-part financial
statement keeps businesses healthy. Construction financials should include cash flow reporting, both in the form of a company-wide cash flows statement and cash flow by job.
 
THE INCOME STA