“We’re in construction and cash flow is really stretched, making it so much harder to run the business and stay positive about what we’re trying to accomplish. I’m tired of playing this game over and over, year after year.”
Especially in a seasonal and cyclical business like construction, you’re going to encounter cash-flow crunches. Cash-flow problems leave entrepreneurs tearing their hair out. Many times I’ve heard owners saying things like, “I’m frustrated because as the business grows the risks keep going up, but the rewards not so much”.
Getting the business on an even keel will take planning, discipline and tough actions on your part as owner. Look at seasonal and cash-flow cycles. Identify the cash needs in tight periods. Think through self-funding vs. relying on bank debt. Lay out a multi-year equipment plan. Evaluate employees and crews. Look at the quality of each customer. Build and use a budget in order to get control.
THE CASH GAP
Each year as the business ramps up, cash flow dries up. Seems like things should be getting better and they’re not, right? After all, sales are up so why do things feel so tight?
While sales increase through the first two quarters, collections have to catch up with outlays. Materials get bought at the beginning of the job. Subcontractors want to be paid quickly and payroll marches on. Typically, it’s the end of the third quarter, beginning of the fourth, that things start to balance out. At year-end, as work drops off, materials and subs drop way down. Customers’ final payments come in. Voila! At the lowest point in sales, you finally have extra cash which often goes to pay off interest and loans that built up because you borrowed to meet cash-flow needs earlier in the year. Sound familiar? Let’s get off this roller coaster.
Take a little time to better define the tight periods. How short on cash is the business in it’s ramp-up period? When does tight cash flow start and when does the crunch start to lighten up?
Lay out a plan to fill the cash gap. How much money would you need on hand at the beginning of the season in order to self-fund shortfalls? How much can you put aside money for next year, as things loosen up through this season’s third and fourth quarters?
EFFICIENCEY, PRODUCTIVITY
Make an equipment wish list, including new equipment and replacements. Set up a schedule to buy equipment over the next few years. Make sure estimates properly charge customers for all of the equipment you need to do the job. Replace inefficient and worn-out equipment so that your crews can make money for you by being productive.
Look at individuals and crews. Are there any that consistently waste time or materials, or make costly mistakes? It’s time to demand that they fix the problems, rather than expecting you to pay for their mistakes. Or, if they can’t or won’t improve, perhaps it’s time for them to move on.
Take a look at customers as well. Do all of them pay? On time? In full? The ones who do are good customers and deserve to be well taken care of.
Which customers stretch payments out beyond what’s reasonable? Which ones expect you to slash prices in order to get the work? Which ones take back your profits by negotiating what they owe? Which ones refuse to sign change orders, then make that your problem by refusing to pay for work they requested?
Separate out good customers from losers; good jobs from bad ones. Identify situations where you would have made more if you’d stayed at home and not done the work and those jobs where profits were only marginal. Establish criteria that will help you to identify good customers and weed out losing situations and clients.
BACK TO THE BOOKS
Based on what you’ve learned, map out a budget and cash-flow forecast for slow and busy periods. Define what expenses are allowed, and when. Watch spending like a hawk, to keep things within budget. If you have to borrow money, put the cost into your estimates. Check estimating criteria to be sure you’re making enough margin.
Use funds you set aside this year to ramp up next year. Stretch out equipment payments with term loans. Increase profits by doing work for good customers, working more accurately and efficiently and by lowering borrowing costs through self-funding. Turn down marginal projects. Repeat the cycle of putting away funds for the coming year at the end of next season. It might take a couple years to fully self fund, but it will be worth it.
Looking for a good book? Try “Contractor’s Survival Manual” by William D. Mitchell.
