Cash Flow Tips for Contractors

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Who wouldn’t like to have better cash flow in their business? Cash flow is not always easy to get a handle on, especially for growing businesses. This week, Wade, Stephen, and Rob are sharing tips and insights that will help you improve cash flow in your business.

Topics covered include what to do with cash when it comes in, why you need a system in place (especially if you don’t have a CFO), the importance of getting accurate paperwork from project managers and sending bills out on time for both you and your customers,  and how technology can help – if it’s set up correctly.

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Rob Williams, Profit Strategist |
Wade Carpenter, CPA, CGMA |
Stephen Brown, Bonding Expert |


Rob Williams: [00:00:05] Welcome to the Contractor Success Forum. Today, we’re discussing cashflow tips for contractors. The Contractor Success Forum discusses financial strategies for running a more profitable, successful construction business. And share our program with your friends and go to those show notes, they’re in the other episodes, you guys all know where they are if you’ve been listening to our show.

So now we have our three long-term construction industry professionals. We have Wade Carpenter with Carpenter and Company CPAs, helping contractors nationwide to become permanently profitable for over 30 years. And Stephen Brown, a construction bond agent with McDaniel-Whitley bonding and insurance agency with over 30 years of experience underwriting and placing bonds for you as contractors. And I’m Rob Williams, your Profit Strategist with IronGate Entrepreneurial Support Systems, driving profit in contractors’ businesses with decades of vertical integration as a contractor, a manufacturer, an aviator, a financial strategist in the construction industry. And so today, what cashflow tips do we have for our contractors today?

Stephen Brown: [00:01:30] And you can add DJ to that list of accomplishments, Rob.

Rob Williams: [00:01:34] DJ? Yes. Color color, man. And the C S F…

Stephen Brown: [00:01:40] All right. Okay. First all, Wade, what is cashflow, Wade? Well, I don’t even know what that means. What does cashflow mean?

Wade Carpenter: [00:01:50] Well, I think anybody, any contractor here that’s listening to this knows what cashflow is. You can have all the work in the world, but if you don’t have the cash coming in, you can’t get it out.

How’s that for a definition? 

Rob Williams: [00:02:03] An awesome definition. So, I guess I hate to start this because Wade’s, he’s the CPA, but to me, the first place to start is knowing what that check that you receive is for. When you’re paid for job number two, it’s not to finish paying for job number one. Wade, how the hell do you know that? How do you know what to do with that?

Wade Carpenter: [00:02:26] Well, if we’re talking about what to do with the check, I think you and I, our experience with Profit First would say we need to put it away and we need to maybe put it aside for like materials and subs, any of those job expenses that were used for that job. And it’s tough to do, to get started on that. And, and, we can work on some systems to get you there.

Rob Williams: [00:02:48] And you’ve got to have a good accounting system before you can know what that is, to know how much to put to each.

Stephen Brown: [00:02:57] Right. You, you invoice someone, the check comes in as an invoice, theoretically, it’s supposed to be posted toward that job and the job costs, but you know, you get kind of afraid sometimes about your cash flow. You don’t know what’s coming up. So I think I’ll just kind of hang on to it. And hoard it a little bit.

Rob Williams: [00:03:17] And it all goes into that one checking account. So how do you know all that money is just sitting there? How do you know what you’re supposed to use for what in the cash flow? This is just one area of the cash flow tip, because for years, we had gone with using that one big bucket of cash, and then you’ve got all these reports to try to kind of project that cash flow. But when it’s behind, it’s just behind. So, how do you get out of that? What do you do? Wade, where do you start?

Wade Carpenter: [00:03:46] Well, we can talk about Profit First and I know this is more about cash flow, but a lot of people say, I’m not making money. I’m behind on my bills. And they say, I can’t do this until I get… and they never get there.  Too much in debt. And the time to start is now, even if you just take 1% and put it aside for profit or towards catching up or you’re debt or that kind of stuff.

Rob Williams: [00:04:09] Yeah. So you’ll have that money for that cash flow when surprises come up. Hopefully, it’s not just a habit that- well, help you get in a habit of putting it aside, but you don’t have a habit of paying the last job with the new check. And getting out of that cycle. And having a system. 

You’ve got to have some kind of system because you’re out there working day to day, and most people don’t have a CFO. Some people do have a CFO, but if you don’t have a CFO working full-time for you for your daily decisions, that are writing and paying all those checks, you gotta have some kind of system because you’re busy getting your job done. So how do you have some system that makes it really simple, that, that allocates that money and puts it in the right buckets? So you’ll know how much is available to spend for that correct cash flow need? Wade back to you, man.

Wade Carpenter: [00:05:01] Well, you, you already kind of went into the accounting and the job costing system, and I’ll go a step further right now because you can have the best job costs and you can have the best system and very expensive software. If it’s never set up right, that’s one thing. But the other thing is, even if you get it set up right, if people do not get the information in there, it’s garbage in, garbage out. 

Nobody wants to go out on a job and come back and do paperwork at night. But it’s one of those necessary evils. And owners let their project managers or supervisors not turn in their paperwork, not turn in the costing. And if you don’t have the paperwork in, you’re not going to get the bill out. You’re not going to get paid. That’s- sorry, I’m on a rant.

Rob Williams: [00:05:47] No, that’s great. Because we started with talking about the general, you know, have your infrastructure in place. And now we’re talking about specifically what you need to do. Get those invoices out on time as early as you can. Because all those days, one day, one day, one day, they add up really quickly, especially if you’re a big contractor.

So let’s move into that, and Stephen, into the specifics of what you do once you get your infrastructure.

Wade Carpenter: [00:06:14] Can I continue on my rant?

Rob Williams: [00:06:16] Yeah, come on. Rant, baby rant.

Wade Carpenter: [00:06:18] Rants for a CPA may be different from other people. But anyway, too often, people don’t get their bills in. You really should want to get your bills in from your subs and your material suppliers so that you can get that cost into that pay application.

And it’ll come in and it’ll sit on the project manager’s desk before it goes to accounting, and then it doesn’t get into that month’s bill and it gets pushed down the road 60 days or 75 days before you get paid for it. And every company they need that instilled in everybody that works there, that cashflow is king. And if you don’t get the paperwork in, you don’t get paid.

Rob Williams: [00:07:00] Yeah. And don’t forget, you’re not Really doing your client a favor when you don’t bill them because sometimes, they may not have their cash all worked out. And they may have spent the money thinking that they had all this extra cash that was meant for you. And so they may get upset.

I told that story a couple of episodes ago about when we started our truss manufacturing plant. We were so busy, and when we started, we didn’t have a controller and we were just going  everywhere, trying to get the trusses out, and the wall panels. We were just so busy. We didn’t bill. It might’ve been a whole year, and we happened to have sold another company so we had a lot of cash. And so when we finally brought them a year’s worth of bills, man, they just about fell out. They were like, you didn’t bill us for a year. And we thought, well, gosh, we’re being friendly. And they were kind of upset about that because it totally messed with their cashflow.

Wade Carpenter: [00:07:55] Stephen you got any comment?

Stephen Brown: [00:07:58] Well, yeah, I think those are some great observations because we’ve talked in the past about reading your contract provisions. And communicating to the owner that look, we don’t want to finance this job. We want to build it. You’re hiring us to build it. So we’re going to abide by the terms of the contract that we both agreed upon. If someone needs an estimate and it’s private work, the sooner and the more professionally you get it to whoever wants that, the more professional you appear to be. And it’s same with your billing. 

People do appreciate getting bills. They want to get it in their system. They have their own cashflow issues to deal with. Federal work, it’s like  an easy pay plan if it’s set up right. You’re going to get that money wired into your account like clockwork. I’ve had a lot of my federal contractors say it’s a very, very peaceful feeling. So, whatever the contract says, that’s one thing. But I think what the two of you were talking about is it trickles down doesn’t it? And trickles back up.

Rob Williams: [00:08:59] It, it really does. That leads into me loving to talk about, Wade, I hope I can talk about that secret sauce. It’s like McDonalds’ secret sauce or the Coca-Cola formula. Wade has got these great sheets about cash flow and all the different items. I could call them line items or things that you follow and you track- now we’re really getting specific, but in his presentation, which we won’t have that today, it’s unbelievable how that adds up over the time of the year and your growth rate. And Wade, I don’t know if you want to reveal these secret sauces on this episode. I, this value’s going to be amazing. Can you talk about that?

Wade Carpenter: [00:09:42] Well, I’m not sure which, which particular secret sauce you’re talking about, but you know, I think the paperwork is the key, and having that system built in. It all goes back to, if it doesn’t get in the system, it’s garbage. Too often owners just let their project managers slide. If you hold their check until they turn their paperwork in, they magically will get that paperwork into you. They’re not turning in receipts and a lot of times they’ll make me, the CPA, the bad guy, which is okay. Wade said you gotta do this. It’s not my fault, but that’s okay. Just get it in. Let’s get it. Let’s get it billed. Let’s get it. Let’s get-

Rob Williams: [00:10:18] Well, there are those certain days, there’s a whole list of things you can go down, typically on your, you get them from your balance sheet or your cash flow statements. Number of days of your accounts payable, numbers of days of your accounts receivable, your inventory days of inventory you have in there. Your work in progress. All those things. You work on all those factors and if you have those lists and you’re constantly improving each one of those, it’s amazing what that does for your cash cycle, particularly if you’re a growing company. Because with a lot of companies, most companies have a – what I would title a negative cash cycle. When you’re growing, the more business you start doing, you actually lose cash flow because it costs you money to finance those jobs as you’re going. You’re making a profit, but when you’re growing, you’re actually losing cashflow unless you can get your payables and your receivables and your work in progress and inventory, all those things to balance out in the closer to zero days, the balance of those are the faster you’re able to grow your company without needing as much cash. That’s kind of where I was going and I love Wade’s – he’s got a whole class on this.

Wade Carpenter: [00:11:30] Well, there is such thing as fundable growth rate and nobody thinks about it, but if you don’t have a profit, if you’re constantly buying a truck on December 29th to get that deduction and you wipe out your profit, there’s not going to be any there to do it, to grow the company.

And I love where you were going, I know Rob, you got an MBA if I’m not mistaken, I don’t know if Stephen does too, but they talk about the cash conversion cycle. And if you know about what you were talking about, the accounts payable and accounts receivable, contractors think about that, but there’s another piece of the cash conversion cycle: inventory. And contractors do not think about inventory. And they really, may or may not have inventory, but their WIP is their inventory. So many people have no clue how much cash is tied up in not getting that bill out. You’ve paid your labor for a whole month, that’s not billed. You gotta collect all that. And when you start looking at the components of what goes into your WIP, that is where you can seriously speed up your cash, the days of cash. That can help you grow even without the profit. 

Stephen Brown: [00:12:38] I can’t tell you how many times I’ve looked at WIPs, work in progress, work on hand reports, they’re called too. Then you’re talking to the contractor and they said, well, the job is showing 50% complete, but we’re really 75% complete. It’s all about billing. If you didn’t bill it, it doesn’t show up in your WIP.

 Rob Williams: [00:12:55] I love the graphical presentations I’ve seen on these. So, if you can get an expert somewhere to try to put this down for you in a format and you can see the difference because, people would say, well, logically if my accounts receivable are the same number of days as my accounts payable, wow. Things should balance out. Well, that’s not really even close because your accounts receivable may start a lot later than your accounts payable started, because then you got to use all those jobs and stuff to, to build that until you can invoice that stage of the job. So there’s a big gap there and, and you can work on that. And then the dollar amounts are, are not different. And hopefully, your accounts payable, what your payments to your vendors are,  are smaller, hopefully, than the money you’re making, so there’s some balance that way. But seeing this on a graphical presentation, it was just mind-blowing to me to see.  Wade, you can tell I’m like a big fanboy here of your presentation of that.


Wade Carpenter: [00:13:56] Well, that’s where, the payables and receivables, you can have exactly the same, and it can be coming in and out, but you’re losing it in your WIP. And that’s where your money is sitting and you’re financing these jobs for these owners.

Stephen Brown: [00:14:10] Yeah. I like your comment about the WIP being inventory too. And also these reports Wade, we’ve been talking about the secrets to increasing your bonding capacity- a good banker really appreciates you having a program that makes sense as far as your billing and receivables are concerned, and your ability to communicate that. 

There are some jobs that you, you know, you’re going to be stuck financing. Maybe you can bid that into your price a little bit, and you need to use a bank to fund it, not your cashflow, and you build it into your job cost. Those kinds of reports really open doors. You’re a completely different level of professionalism when you talk to a banker and you have that kind of information. They will fight for your business.

Rob Williams: [00:14:53] And Stephen and Wade, y’all both alluded to, how some of these technology tools can help that. They don’t solve that usually, in my experience. Well, first you gotta know how to use them though, don’t you Wade? you know, How can some of these systems help?

Wade Carpenter: [00:15:10] Well, there’s a lot of things we can do. And I think we’re probably going to do an episode on that.

Rob Williams: [00:15:15] That would be a great idea. Y’all, tune in for that episode.

Wade Carpenter: [00:15:19] There’s a lot of things that are out there now. There’s a lot of technology that can help speed up billing, and where your, vehicles are and things like that, that, help you job cost them. Once you put them in place, they really pay for themselves easily.

Rob Williams: [00:15:33] But you still got to work at them. I’ve made that mistake, thinking that I had some fancy accounting system that was going to solve everything. I can’t tell you how many times I bought some software program that I thought was going to solve every problem I had. But it’s always constant work to do that when you get some of those systems in, you got to work at it still. But hopefully what it does is it shines that bright light on the situation because the first situation is, is knowing and understanding where you are before you can really do anything about it.

Wade Carpenter: [00:16:06] Too many people rely- if we’re going down the technology, we won’t go deep into it, but- they’ll spend 20, 30 grand on this nice construction accounting software, and then they tend to pay two to three times more in consultants to set it up. And it’s never set up right. And it’s never implemented correctly in the construction business.

It’s not worth the money you paid for it. And it’s not the software’s fault. Believe it or not, that $150 million contractor I was telling you, he’s running on QuickBooks, but they run it well on QuickBooks. And you can run $150 million contractor on QuickBooks. I’m talking about the desktop. Don’t get me started on the QuickBooks Online for construction.

Rob Williams: [00:16:49] That’s a good point because typically– well, we’ll talk about the other one, but I was going to say, we used to have a rule of thumb, to implement whatever system you buy is three to six times the system. But sometimes we’d find it was 10 times. I, I sat a guy down in the nineties, we got this great estimating system and I sat a guy down there, one of my superintendents that was actually a really, really bright guy. He sat in there for two years trying to put all these things into the account; he says, and we never got a house out for two years.  

Wade Carpenter: [00:17:24] Yeah, I read that all the time.

Rob Williams: [00:17:26] Yeah, that’s, that’s a different episode, but…

Stephen Brown: [00:17:29] And I’ve had contractors, Wade, buy software and not talk to their CPA about it, which is insane. If you’re not familiar with it, sometimes you’re speaking two different languages.

Wade Carpenter: [00:17:39] Well are you going to get me on another rant?

Stephen Brown: [00:17:41] Okay. Didn’t mean to do it that way.

Wade Carpenter: [00:17:43] These estimating and project management plugins… yeah. And they, they sell people and then change it, okay.

Stephen Brown: [00:17:51] Yeah.

Wade Carpenter: [00:17:51] CPA fired up.

Rob Williams: [00:17:53] Man. We got to have an episode on this baby. Yeah. Let’s have a rant episode on this technology in accounting and cashflow for contractors.  That sounds like a really exciting one that we’re going to have. 

I guess we need to wrap this one up, guys. We are already past that again. I say this every time. Wow. We keep passing our time. 

Any last bits of information we want to share? I would say when you want to have the growth rates out there, if you’re growing, particularly like this economy, you better know your cash cycles. Get with somebody, ask them, what’s going to happen to us? Can your CPA, your cash guy– I don’t know if you’re bonding guys might be able to help, but what’s going to happen to you if you grow two or three times in a year? Is that going to put you out of business? Know some of these factors and see if you can do something about it on the front end.

Know your numbers, or get somebody to help you know the numbers. You don’t need to go get an accounting degree or an MBA or run a construction company, but there are people out there for you. So know that, hang on. 

So, this is the Contractor Success Forum. Thanks for a wonderful show today. We have with us Wade Carpenter, Carpenter and Company, CPAs, and Stephen Brown with McDaniel-Whitley Insurance Agency and bonding agency. I’m Rob Williams. IronGate Entrepreneurial Support Systems, your profit strategist. 

Don’t forget our construction notes. You can go find those and find our information on there or at ContractorSuccessForum.Com. This is the Contractor Success Forum. Thanks for listening.

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