Cash Management for Construction Companies – Part 2

Cash for your construction company

Cash is king and cash flow management is what ensures your construction company has it when needed.

This is part 2 of the article on Cash Management for Construction Companies. – TCW

Of course, many subcontracts stipulate that a certain percentage of the work must be completed by your company, which thereby places a defacto limit on the amount of work you can subcontract. In addition, quality and safety are often a concern when you utilize a high number of sub-subcontractors whose performance and sourcing you cannot directly control. Shoddy work leads to missed completion dates and additional expenditures tied to correcting mistakes. Consequently, over-dependence on sub-subcontractors can lead to cash flow shortages and other operational issues. This is yet another reason for the demise of some subcontractors while carrying out a contract.

Line of Credit

A line of credit can help you weather cash shortages by leveraging working capital. Working capital is short-term assets – short-term liabilities or typically cash + account receivables – account payables – payroll payables. You can use your line of credit to pay payroll, rent equipment or purchase supplies when you cannot get terms. If you do not have a line of credit with a bank, pursue one.

Build a Relationship with a Business Banker

Cultivate a strong relationship with a banker at vice president (or equivalent) level and above. When the credit markets are roiling and many banks are dealing with issues in  their own lending portfolios, strong relationships play an even larger role in obtaining credit. Thus, if you had strong relationships (and your banker was still employed!) during the Great Recession, you would have continued to have access to credit, despite what was happening to other construction firms around you.

Sales commissions should not be paid until the customer pays.

Unpaid accounts receivable can be used as collateral for loans.

Accounts Receivable Financing

You can also pursue a line of credit with an accounts receivable financing or factoring firm. These charge much higher rates than banks but often are a good source of capital if you have significant growth or garner a much larger contract than is typical for your company. Banks use your company’s three-year historical performance to provide credit lines so large increases in revenue over a short period often do not translate into a credit line increase for a few quarters.

A/R Financing Qualification and Rates

A receivables financing firm will provide a line based on your historical financials and the credit-worthiness of your customer. Unfortunately, since construction  contracts and the attendant receivables often have the retainage provision, many receivables financing firms do not provide credit lines to construction companies. When they do, it is often at higher interest rates to compensate for the higher risk. Rates can be as high as 4-6 percent per month – assuming a 30-day payoff on the receivable – which is 48- 60 percent per year!!! Sometimes you have to take what you can get but do so only for very short periods with a plan of action to obtain other financing at much better terms within the next four to six months.

Summary

To summarize, cash is king always but definitely in restricted capital environments. As always, money remains available, but it could longer and require more creativity and perseverance to access it. Therefore, do the following:

  • Plan your cash needs.
  • Budget your cash resources as much as possible.
  • Know your daily spend rate, be able to quickly determine how much cash you have on hand at any given time.
  • Know your expected operating cash flows and the timing of those cash flows.

If you do not know or do the above, you are headed for trouble. Or you may already be troubled –stressed out, continually seeking money from somewhere, continually trying to increase revenue even though you lose money with each sale. Stop!!! Determine your cash outflows and inflows on a per project basis, and make decisions based on that information.  You may have to jettison slow-paying, high-complaint customers. When cash is king, these customers drag down your bottom line in terms of cash and lead to negative cash flow and financial troubles.

About

All rights reserved.© Tiffany Wright is president of The Resourceful CEO, LLC a management advisory firm that helps business owners position their business for sale to transform it into a high value, high cash flow business that helps owners achieve their business and personal goals. Tiffany is the former publisher of Equal Construction Record, a commercial trade publication, and the former COO of TRW Price Construction. She is the author of The Funding Is Out There! Access the Cash You Need to Impact Your Business, available on Amazon.com  Please contact her at twright@theresourcefulceo.com.

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