Practical advice for building a Cash Flow Forecast

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When done properly, a cashflow projection or forecast can not only help you secure bonds and banking, but it can also serve as a roadmap to building a great business. This week, we’re offering some practical advice on this useful tool: who should do it, how often it should be done, and how it might look different for construction companies.

Topics we cover in this episode include:

  • Why you might need a cash flow forecast (even if you have a lot of money in the bank)
  • How far out and how frequently you should do a forecast or projection
  • Using long-term cash flow projection as a planning tool
  • How to boost your bonding capacity with accurate cash flow projections
  • Cash flow projection considerations unique to the construction industry

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


[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today we’re discussing practical advice for building cash flow forecasts. On the Contractor Success Forum here we discuss how to run a more profitable, successful construction business. 

And with us we have Stephen Brown with McDaniel-Whitley Bonding and insurance agency. And we have Wade Carpenter with Carpenter and Company, CPAs. And I am Rob Williams with IronGate Entrepreneurial support Systems. So today, Stephen, I know Wade is gonna be all over this. So is it important for you guys as a bonding agent to know about that these guys have cash flow forecasts?

[00:00:48] Stephen Brown: No, not really. It’s, Hey.

[00:00:51] Rob Williams: Cash is just not important, is it?

[00:00:52] Stephen Brown: Do you, what do you want to hear here? We’re not self-promoting anything on the Contractor Success Forum. We are just giving information. You can take it if you want it, but I think as always, of course, we have a fantastic topic here and what Wade wants to talk about.

Cash flow. Dad gum, what a wonderful thing. What a horrible thing. What a scary thing. It doesn’t have to be. It gives you power and it makes you money, and it keeps your stress levels down and it makes you happy. I don’t know what could be better than cash flow management.

[00:01:28] Rob Williams: Cash flow is the lifeblood of our businesses. And I tell you what. I’d say more than half, I don’t have a statistic on it, of the new calls that I get is something about cash flow. Because they always kinda want to call. But when that cash flow hits, boy, then that’s when they make the call.

[00:01:47] Stephen Brown: What makes cash flow so exciting, Wade?

[00:01:50] Wade Carpenter: Well, I’m not sure what makes this exciting, but I do have a story I wanted to relate. I don’t think I’ve told you guys in the couple years we’ve been doing the podcast. But early in my career, I think I was like three years in public accounting, I got tasked to do a special project for a commercial concrete contractor. To do a cash flow projection. This was 30 years ago.

This, we were back on the like Lotus 1 23. This was before Excel. And I found the whole project, it was really fascinating because learned hey, we’re projecting X amount’s gonna come in. We have retainage going out and all these other things that went into it. But when we completed it, it helped the company get a line of credit and bonding because they were expanding.

But everybody was so impressed with it that I got asked to speak at this construction symposium. And it was basically all kinds of construction topics, but the whole afternoon was like these round tables. And I think there was eight round tables per session, three sessions. And again, this was early nineties, so when they came in, they had to sign up on a piece of paper for which ones they wanted to go to that day, and there was X amount of slots per round table.

Well, the signups for mine, they kept on going down the page and believe it or not, we had three times the number of people sit in on my session and I got such good feedback. Right then and there I was like hey, this is really one of those things that contractors really care about. And it’s something that I’ve really been fascinated by over the years.

And in fact, I just got to thinking, my second highest billing client, not the biggest client I have, but the second highest billing client I have came to me because I was known for doing these cash flow projections. And they had a complex situation. 

What I learned from projecting cash flow is number one, it’s complex. It’s a lot more involved than trying to build a cash flow projection for a standard service based business or whatever. Number two is the methodology really has to fit the type of construction you do. And universally, people want to know how their cash flow is, you know, what’s coming and that kinda stuff. But few people will take the time to do it and do it well. So today, I hope what I’m gonna give you is some practical advice on accomplishing that.

[00:04:16] Rob Williams: Wade, I was just working on my own cash flow. But it was interesting, in QuickBooks, it’s like, here’s your cash flow thing. So I went there and basically it’s just, you have to have your information plugged into your Accounts Receivable and your Accounts Payables. I was like, Well, this is not very helpful for me. I wanna know the things that I don’t have plugged in there yet. 

Cashflow Forecast vs. Projection

[00:04:37] Rob Williams: So you know, you mentioned to us earlier the forecast versus a projection. Does that have to do with that or what is the difference?

[00:04:44] Wade Carpenter: Well, a lot of people don’t know the difference and sometimes I have to remind myself what the difference. A forecast is literally, this is what we expect is going to happen. Based on what we know right now, this is what we– Now a projection, we can make certain assumptions. We can do scenarios and say, What if we bought this machine? Or what if we got this contract? 

So essentially a forecast is the most likely scenario, a projection, we can take things into account and we can make certain assumptions. For a projection, I would say we had an episode where we talked about throughput accounting. And when we look at a projection, that’s the kind of thing where you can see how, the example I gave in that episode was, you may have a lower gross margin, but you could end up making more money. You can see the cash flow from it. 

And number two, a properly done cash flow, especially if you’re growing, can tell you if you’re gonna run outta money. Can tell you if you can afford to grow. 

[00:05:45] Rob Williams: I wish I had known those words yesterday, but I guess I was looking for a projection when I said I was doing a cash flow forecast, but might be good. That might help some of our listeners, if they’re talking to their own accountant, to know the difference in those words of how to express what they’re looking for so they won’t be upset with their accountant when he just gives them a forecast instead of a projection. Yeah.

[00:06:07] Wade Carpenter: Well, it depends on, and I may use that interchangeably as we talk about that today, but what we talk about as a CPA if I give a opinion on doing this projection, there are some parameters we have to put around it. But I may use that term interchangeably today, if that’s all right.

Why do I need to track cash flow if I have a lot of money in my account? 

[00:06:25] Stephen Brown: What about the fact that I have a lot of money in my account? Why do I need to track cash flow?

[00:06:30] Wade Carpenter: Well, as we all know in construction, a lot of money in your account can be very deceiving and that can go away in a heartbeat if you’re not watching it, so.

[00:06:41] Stephen Brown: And you don’t know where it’s all allocated and what’s expected.

[00:06:44] Wade Carpenter: Right. So if it’s okay, can we just talk about some of the situation where you might need one?

Why you might need a cash flow forecast

[00:06:51] Rob Williams: Yeah, why might we need a cash flow projection or a forecast, Wade?

[00:06:55] Wade Carpenter: Well, the biggest reason I would tell you to do it, which few people take the time to do is basically manage and control your cash flow internally. That can tell you quite a bit and it can help you make some decisions that whether one path is better than the other path. For bonding, we’ve done certain, I can go into that in a little bit later, but like that concrete contractor. They were gonna burn off so much of the billing every month.

So it would kind of release some of that and, it can help you with the bonding. It can help you with the banking, if you’ve done it properly, and I’ll talk about some of that in a little bit. But a poorly done projection can kill the trust in it. If you just throw some numbers out there, it can also have the reverse effect if you don’t really put some thought into it. But.

How far out should I project cash flow?

[00:07:43] Stephen Brown: So how long do you project the cash, Wade? Is it short period, a long period? How often should you be doing that?

[00:07:50] Wade Carpenter: Well, it depends on your needs. I have some contractors that do it every month. It depends on where you are. If you’re in a heavier growth cycle, you may need to do it very often. And if cash flow is tight, you may need to do it, and I’ll talk about. The frequency and that kind of stuff in a minute. But if you’re in growth mode, you just need to make sure that you can ensure the growth and you’re not gonna run outta cash. 

[00:08:15] Rob Williams: Yeah. A great story on that is when we started our trust manufacturing plant, we put a bunch of money in the bank to start, so we had it sitting there, so we’re like, oh, this is great. We didn’t think about what we would need on some of these big, long jobs that may not pay you the way you want to do it.

So, so we were like, oh gosh, we can buy this saw, or we can buy these trucks with cash. We don’t need financing, we don’t need these things. But when you get down the road for anybody, we didn’t specifically have this problem, but you may be restricted to what sales you can make now or what jobs, because you may not have the capability to do certain jobs because they don’t pay you in the cash flow manner that is acceptable. 

Or even worse, you take the job and then you go broke because you don’t have the cash and you don’t realize it when you take the job, that they pay you after the work’s done and you’re gonna have to buy all this material and get it done and looking at that contract.

So anyway, that, that was big realization for us as we got into some big jobs.

[00:09:23] Wade Carpenter: So, you know exactly what you’re saying. The classic example is the retainage part. If you got 10% of your profit and you figured X amount of profit, well, I’m fine. Well, you gotta figure, hey, well you’re not gonna get that 10% until the end of the job.

[00:09:38] Rob Williams: Oh yeah.

[00:09:39] Wade Carpenter: But I guess going back to what Stephen’s previous question is should it be a short term or a long term projection? A lot of people don’t even consider that. And what Rob was talking about, like what QuickBooks does is pretty crude, but it’s probably better than nothing. But you gotta think about the inputs but that was probably more of a short term kind of thing. 

For a contractor typically, I kinda put them in buckets. A short term, I would say would be no more than six months out because the farther you go out, it’s tougher to project. Sometimes you don’t know what’s coming down the pipe, but you know, a short term projection, is typically six months or less and it’s a lot more focused. We may be projecting by the month, but we also may be looking to project by the week. You gotta know when things are coming in and when things are gonna go out. And maybe you got a big worker’s comp bill due. 

So the short term projection is more for management. 

[00:10:41] Rob Williams: So is the short term projection, just putting together your, well on a simple company, your Account’s Payable and your Account’s Receivable? I guess for a contractor you’ve got a few more factors that are sort of known.

[00:10:54] Wade Carpenter: Yeah, we’ll talk about some of the drivers of that, especially in construction, in a minute. But, the longer term projection or cash flow forecast, whichever, really in my mind, has a different purpose. A lot of times, it might be for the bonding company to say, hey, this is how we think it’s gonna go. And if you got say, a longer term contracts, you can, if you’ve got the backlog, you can take guesses to how you’re gonna come out and when you’re gonna build things. 

Long term cash flow projection is a planning tool

[00:11:21] Wade Carpenter: And a longer term cash flow projection is more of a planning tool for me. It gives you some kind of thing to shoot for and, especially when I think about a long term cash flow projection, it’s not just looking at cash, but you also look at the income statement as well as the balance sheet.

Number one, if you’re not looking at that and what happens, those are really made up numbers because you can say, hey, this is gonna come in and go out, but there’s so many other things that you gotta take into account and the fact that, you got these bills coming in or whatever. So I see the longer term projection as something to use to give a contractor something to shoot for.

And if they’re planning on growing, it can easily point out the fact that, hey, we’re gonna have some kind of cash flow deficit here if we keep growing at this pace. That’s when you go to the bank and you can take it to the bank and they appreciate that as long as it’s not made up numbers.

[00:12:22] Rob Williams: One thing I’ve run into lately is when you have these cash flow projections, are the underlying assumptions of these cash flow projections when you’re doing it like the receivable days or something. I was recently dealing with a contractor who had massively different receivable dates on his jobs and they’re not even aware that it matters.

 They had a lot of cash in the bank, like Stephen was saying, but they did have some problems cause they had some big jobs and some smaller jobs. And the big jobs a lot of times tend to pay a lot more slowly. So when you get those in there, it will really skew your days of receivables coming in, and I think it’s important for these contractors, when Wade and your accountants make these cash flow projections that you know what the assumptions were so when you’re out there getting jobs, if you’ve got a 90 day job coming up, you need to let the guys know that, hey, we got something different because this cash flow projection is not gonna work out.

I think a lot of guys, they would know it if they’re told that, but they just don’t process that when When they’re going through these jobs. They’re too busy bidding and doing the takeoffs and trying to figure out the quote, profit of the job without thinking about what the cash flow is.

[00:13:43] Wade Carpenter: You get down in the weeds. Yeah, I know exactly what you’re saying. 

Boost your bonding capcity with accurate cash flow projections

[00:13:46] Wade Carpenter: And there’s software out there. There’s things to do this, or you can do it in Excel. But if you use a flat growth factor or something like that and just say 10% growth across the board, it is easy to come up with something that is gonna say, well, hey, in a year’s time or two years time, we’re gonna be putting a million dollars a month in our pocket.

And it’s easy to create a scenario that it looks unbelievable. And when you turn something like that into your banker, your bonding company, they’re probably gonna distrust it more than they would if you hadn’t given them anything at all.

[00:14:21] Stephen Brown: That’s right. Don’t even do it. And remember that you get bond credit based on your backlog gross profit. So you gotta show the bonding company and your banker that you’re conservative in your profit estimates and you’re bringing the projects in according to your profit estimates. So that’s everything.

Not only do you have to show the bonding and bankers that you’ve got to, more importantly, show yourself. These cash flow projections can be a great way to exponentially increase your bonding capacity.

[00:14:52] Rob Williams: Yeah. I was just saying something a minute ago, talking about building that construction cash flow forecast. And there may be more things you have to say on that, Wade, and then getting into what I was talking about. But those cash drivers that you’ve talked about so many times that are so important.

I don’t know if you wanna talk, a little bit more about building that cash flow forecast and then get into those drivers?

[00:15:16] Wade Carpenter: Yeah. One other point on, just real practical thoughts and then we can jump into those drivers is, there’s software out there to do it. The majority of them out there are longer term projection type tools, but there are some shorter term tools to where you can look at it on a weekly or a monthly basis. And depends on what your purpose is.

Again, even if you have one of those tools, it’s very easy to put something in there and put a number and you just run it out and well, hey, at some point it really becomes unbelievable. So just, gut check is this reasonable to put on paper? Look at the whole thing.

But, to go to, your point Rob, as far as the drivers, you can’t just take a cookie cutter to construction. The first thing I would tell you is look at the type of jobs you’re doing. Are they really short term jobs? Are they long term jobs? I was using the example of a concrete contractor. If you got somebody that’s doing big concrete jobs, that can take months or I’ve got one that’s gonna be a couple years worth of concrete work that’s working on right now.

But then there’s other guys that do driveways and curbs and stuff like that, they may be done in a day or two. So developing the methodology really needs to look at how long your contracts are, how you paid receivables and stuff like that. Retainage. 

[00:16:39] Rob Williams: This just made me think of this, there’s this big tennis center, the University of Memphis that I keep passing, and they’ve had this material stacked up on that thing. I guess it’s the roofing. It looks like some kind of foam.

[00:16:51] Stephen Brown: Yeah, it’s three stories high.

[00:16:53] Rob Williams: Yeah. Oh yeah. It’s close to your house too.

Yeah. And it’s been sitting out there forever. So I was thinking about this with the cash flow. So many of our successful guys that are making good profits right now have pre-purchased this stuff during Covid, because these pricings have been, but gosh, I keep thinking about the cash flows that must be happening of this.

These guys pre-purchased this and boy, that’s a big driver. One of the examples, I think that’s something you’d definitely be wanting to talk to your accountant about. Now that’s, well for me, I think the two biggest issues that I’m running into are the extra WIP, or inventory, I guess, that people are getting into for the pre purchasing and then the receivables that are not received.

It’s, those are big things. So those are those drivers that you may have to change a little bit for your forecasts in this season.

[00:17:41] Stephen Brown: Sure.

[00:17:42] Wade Carpenter: Thinking about some of that stuff, to actually properly do a forecast, you really have to have the good inputs, good books, and there’s so many contractors out there, they just keep it on a cash basis. So if you’re not tracking your receivables or you’re not tracking your retainage, or you put your retainage in a bucket with rest of your receivables, that’s gonna skew those days to collect your receivables. Not tracking your payables, but you know, proper books can make all the difference in the world to where you can get an accurate cash flow projection or forecast.

[00:18:16] Rob Williams: Oh yeah, that’s a big time. We were going through a drill I just yesterday with a contractor, and he had all his cash flow drivers. We had gone through a drill with post-it notes up on the wall. And he, he may not have those forecasts that you’re talking about like that, but what he did is he finally understood those drivers.

So he put the post-it notes of the drivers up on one thing where everybody can see it. And he’s got all these ideas of how we can improve and stay to that. Just, I’m getting some more ideas I may have to share from him just from this conversation that we can take back and add to that maybe like a target.

That’s one thing I don’t think on our post-it notes, we didn’t say, well, how many days is that? You know, is, is how to improve it. But the the guys that can share, they take this information from you Wade, in these cash flow forecasts and do something with it and let your team be able to help you with it, communicate it.

And so you don’t have those guys putting those drivers because they take a job because they are segmented. And this company had different, they weren’t in Covid, they’re not even in the same buildings anymore, they’re working in different places. And so the sales department may be doing something and the owner had no clue, what they’re doing.

And they had multiple owners so. But anyway, back on the, these drivers are just this year in our last couple years we’ve been doing this, these cash drivers in our–,

[00:19:37] Wade Carpenter: They really have.

[00:19:38] Rob Williams: That’s just really float floated to the top for me, of the important things that we share on the Contractor Success Forum here.

[00:19:45] Stephen Brown: No I think that’s really important too, guys, because things change. They never stay the same. They change and be proactive, not reactive. And you’ll get through it.

[00:19:56] Wade Carpenter: Yeah. Well, like I said, let’s just point out a couple of these drivers. Rob’s already talking about receivables. That part obviously it’s, it is different for different types of contractors. Do you have a one time billing and you pay and then you get paid immediately? Or do you do progress billings? What are your payment terms? Are take 30 days, 60 days? Again, with these progress bills, sometimes you need a separate schedule to track these receivables and the collections as well. And as we said, retainage can throw a wrench in on the whole thing.

It depends on the types of contracts you’re doing. The payables, the average days to pay, those kind of things that I’m sure Rob is dealing with his clients on. But we also have some large general contractors that are paying subcontractor retainage payable. And you have to separate those things and say, well, a big lump sums gonna be due here when we get to collect this money. 

As Rob already brought up, the inventory or stored materials, if you’re buying it up front, a lot of times we don’t typically throw that into our contractor calculations. We discount these things and sometimes the contractors’ books are not designed to track these things properly and all these supply chain issues can be something that we may never have thought about before because we’re buying this stuff up.

[00:21:12] Rob Williams: Yeah. Yeah. And just to explain it to the guys, I don’t know that I separated them in my mind as much. You have the inventory, the stuff that’s not installed on that job, but that your Work In Progress is work that’s out there, that has not been invoiced yet. Then it becomes a receivable.

I don’t think I delineated that well enough in my mind. When I had a lumber yard I did because it was physical inventory sitting right in front of my face. So I knew that was inventory. And then once it turned into a product, it was WIP. We would invoice it and it usually went right out.

But when you get these jobs that have different materials, especially during Covid, that they have all these delays, it’s pretty important to know and understand that what it is on your books and how that’s gonna work and communicating that to Wade or your different, your CPAs on that, on those drivers. 

Cash flow projection considerations for the construction industry

[00:22:03] Wade Carpenter: There are some weird things obviously in construction you have workers comp audits that maybe you have a big hit. It is very common for the contractors that work outside to have a lot of seasonality issues. And if you just say, hey, across the board we’re gonna do X amount per month, a lot of times that goes out the window and we need to take those into account.

Just trying to avoid these pending cashflow crunches. So if you see something coming up, you may have to ask for maybe a temporary increase in your line of credit, but the idea is let’s avoid these high pay, I call them pay by the day, or pay by the week, loans.

[00:22:40] Rob Williams: Yeah.

[00:22:40] Wade Carpenter: People get in this desperate situation and they don’t realize how much that really is costing them, and that can kill the profit for a year.

[00:22:48] Rob Williams: Yep.

[00:22:48] Wade Carpenter: That make sense?

[00:22:49] Stephen Brown: Sure.

Margin is a cash flow driver

[00:22:50] Rob Williams: It does. You know, one more driver that people don’t think of as a driver a lot of times– I did not, at least I’ll say people, is the margin. Obviously we know that’s the profit, but that is part of the drivers, that goes in there. So if your margins are different and you’re making these forecasts of your receivables and payables out there, well, but that is profit and that margin makes a really big difference too. It seems so obvious to think that, but a lot of these calculations, they’ll just make these forecast calculations given the average margins of a long time. 

And actually, I just saw this on one guy, his margins slipped dramatically during Covid. He didn’t have a lot of inventory, so his margins slipped. So, so it was not figuring out to the normal calculations they were doing. So, that’s a driver as well as your receivables and your payables and your stuff. Your margins can really affect it dramatically on your cash flow as well.

I know we tend to talk about profit is one bucket and then all these other timing things, but your cash flow is profit, plus or minus all those other things. I know it’s sort of an obvious thing to say, but sometimes that gets lost in the shuffle because they’ll assume it, which this is, this actually just happened to me recently, they were assuming that normal, let’s say 30% margin and it wasn’t. It was like 13, not 30. So it really hurt their cash flow. So, yeah, this cash flow stuff is just the cornerstone of most of these businesses because it’s the lifeblood of your business.

[00:24:28] Wade Carpenter: A properly done cashflow projection or forecast can really help you grow and manage a business. It can also help you secure the bonding, banking, those kind of things. But the way I see it, it can be also a great roadmap to building a great business. That’s something I didn’t really go into but do doing the properly done forecast is also gonna project out your receivables and balance sheet to see if all this is reasonable. 

So, if you’re not doing those, consider doing it. Reach out, get some help. I know Rob’s doing some work in this. This is something I always love to talk about. Get some help from somewhere and I hope some of the stuff we said today maybe at least made you think about some of the things that are driving the cash in your business.

[00:25:11] Rob Williams: All right. Well, this is great. All right. Stephen?

[00:25:14] Stephen Brown: I think it’s great, and a wonderful topic. Thanks, Wade.

[00:25:19] Rob Williams: Well this has been another wonderful episode of the Contractor Success Forum here, and I appreciate you guys tuning into Wade Carpenter, Stephen Brown and Rob Williams. And we’ll be looking for you on the next episode of the Contractor Success Forum.

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