We’re starting the year off with a topic that’s crucial to any contractor’s long-term success: getting a handle on your cash flow. Join us to find out how you can better manage cash flow at the project level and create a short-term cash flow plan.
Topics we cover include:
- How a short-term cash flow plan can be more useful than a five-year plan
- Managing multiple jobs that affect your cash flow differently
- How creating a short-term cashflow plan can benefit your relationship with banks
- Cash flow statements vs. projections and how each can be useful
- Specific considerations for cash flow projections in the construction industry
- How receivables factor into cashflow and company growth
Subscribe for free resources and to be notified of future episodes at contractorsuccessforum.com/subscribe
Find all episodes and related links at ContractorSuccessForum.com.
Join the LinkedIn Group at https://www.linkedin.com/groups/14026881/
FIND US ONLINE
Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today, we are talking about project cash flow and how cash flow is king. And we are the Contractor Success Forum. We discuss financial strategies for running your business more profitably, and successfully running your construction business.
We have Wade Carpenter, Carpenter and Company CPAs, with over three decades of experience. And we have Stephen Brown, a construction bond agent with McDaniel-Whitley bonding and insurance agency for over 30 years with experience underwriting and placing bonds for you as contractors. And I’m Robin Williams with IronGate Entrepreneurial Support Systems, driving profit in your businesses with decades of vertical integration as a contractor, a manufacturer, an aviator, and a financial strategist in the construction industry with you.
Today, guys, we are talking about project cash flows and how cash flow is king. Stephen!
[00:01:14] Stephen Brown: Well, we’ve always used that expression. Cash is king for bonding purposes, having cash in your financial statement. But cash flow is king too, because you can’t have cash without cash flow. Can you, Wade?
[00:01:28] Wade Carpenter: Well, if it doesn’t come in and you don’t have any to send out, so.
[00:01:32] Stephen Brown: Well, that’s right. That’s right. And, and, cash flow to me is something that I think our listeners need to understand what it means from a construction standpoint, from a contractor standpoint. Because cashflow to a contractor is really about managing the cashflow of each of your projects.
Wouldn’t you say?
[00:01:54] Wade Carpenter: Yeah, definitely. I know we were kind of talking earlier about the difference between the cash flow statement that you might see in a financial statement versus what actually happens on a job. You wanna elaborate on that, Stephen?
[00:02:06] Stephen Brown: We were talking about that earlier and you have one job whose cashflow is the tail wagging your cashflow dog. Cashflow is just all about the process of money coming in, cash flowing into your company, and then you paying out your expenses. But it’s a lot more than that.
We’re talking about managing cashflow. A lot of times you might have a job that is having very poor cashflow. And it’s messing up the cash flow of the rest of your business. So what can you do about it?
[00:02:40] Wade Carpenter: Well, I guess from my perspective, for a lot of contractors, I try to say, well, look ahead on your cashflow. And for years, we’d try to do like a five-year cashflow. Well, maybe that helps you plan or something like that, but really it may have absolutely nothing to do with your job if you can’t make it through the next quarter.
So what I’ve been focusing on is more of a short-term cashflow plan. Like a six month cashflow tends to mean a lot more than a five-year plan because we can get a lot more granular and know what’s coming in. But even for a contractor that, you know, they weren’t living week to week, so I’ve gone even lower than that. The 13-week, one quarter cashflow projection can definitely tell you if you’re going to be able to make payroll two months from now or something like that if you look at it. And we’re breaking it down by job.
[00:03:35] Stephen Brown: So the faster you put together a cashflow statement and understand what your cashflow needs are for the next period of time, the faster you can react. If you don’t know, you don’t know, it just gets worse. That’s the hard thing I think about understanding cashflow. When you’re in a tough situation and what you don’t know just makes things worse. It just makes it more stressful and it doesn’t have to be that way. We’ve talked on an earlier podcast about all the systems in place that improve your cash flow. Every little detail of how to bill it, how to negotiate your payments, how to communicate what you expect from that owner. How your project managers or managers get their report in so you can bill. All of that we’ve discussed in the prior episode. But this week I was hoping we could talk a little bit about cashflow problems. Rob, what does it feel like to be a contractor with a certain job that’s dragging you under?
[00:04:38] Rob Williams: It was really interesting because as I think about this, when I was a home builder, we didn’t really, we didn’t have a cashflow statement that we looked at very much because these loans always funded us. They pretty much funded whatever we needed, and it seems like we were building fast enough and we’d have enough there.
We didn’t have a cashflow report. You just took a bank draw and those always seemed to work. So we just had our P and L and I don’t know that we really looked at our balance sheet all that much. As much as we could. We definitely didn’t look at cashflow projections. So then when I, when I changed some of the things that I did when I opened the manufacturing plant, man, cashflow was a whole new experience for me that I didn’t realize about.
Cause you didn’t have. Loans for that. You had to put your own money in. They weren’t loaning you like they do on a real estate job. And then when we had the framing crews out there, it was our cash. It was not on bank loans. So my whole world changed a lot and I had to get a big education on the cashflow statements. And knowing what a cashflow statement is. Wade was just talking about the different time lengths of it, and it made me start thinking about what we had. I did have controllers and things in my business to help me. But yeah, we did have long-term cashflow plan– which, backing up to the home builder thing, that’s where you get in trouble by not watching it because you have all those things.
Then when things slow down and you don’t have the next job to pay for the previous job, it’s oops. Now it makes those hard times for home builders even harder because they were, as Stephen likes to say, robbing Peter to pay Paul.
When you’re using your own money to finance these jobs, and you’re not doing everything on bank loans, you really have to have those cash flows. We had long-term cashflow projections that weren’t really based on, I want to say reality, but they were, let me just say they were projections. It wasn’t what already happened. So you have sort of the long-term thing, but then you have the short term cashflow things, which really fits in a lot more with the Profit First ideas.
But what we had back then before Profit First is, especially when we came to The Great Recession over there, ’07, ’08, ’09, every day I had a cashflow report on my desk that they would prepare. And it was every single vendor and payment that we had in the payroll. And we were making sure that we were juggling our priorities and that was on the very short term thing. Profit First, I wish I’d had Profit First then, and then I wouldn’t have had to go into all that effort to do that. We would have had the right buckets because we were always fighting that day and then how much to take out. And we didn’t have a proactive plan. We had that long-term cash flow based on projections, which are not reality. And those didn’t happen when you had the downturn. So we believed all that and I’m not even sure where the money was going. But it may have been going to equipment and things like that rather than doing the Profit First method where, when you’re making that money, you put it in the buckets and then that’s what you buy your equipment with. Cause you’ve already earned it.
[00:07:52] Stephen Brown: Well, that makes a lot of sense. Wade, what do you do when you have different jobs that are performing differently and affecting your cash flow? How do you manage that?
[00:08:02] Wade Carpenter: That’s where I kind of wanted to come back to what you were talking about, like a job cashflow. And I remember one example from several years ago, it was a concrete contractor that did 20 to 25 million a year. And they had taken on this one job that was gonna last over– it was a couple year job. And the bonding company was a little nervous about that too. Number one, because they had the 10% retainage and they billed once a month, like a lot of contractors and they collect once a month. They were worried that they were going to run out of cash before the whole thing was done, even though there were a strong contractor.
So what we did was like every month, at least for 12 months out, we would say, what are we going to bill on this job? And we’re going to back out to retainage. What kind of materials and what kind of subcontractors are we going to have on it? And we actually made a list of every job. They still had several other jobs running, but you know, every month we were projecting, this is what we’re going to bill, this is what we’re going to have to pay out. And we showed the bonding company and they loved it, number one. But number two, it helped my client go to their bank and say, we’re going to have a little dip here in cash. We’re going to need a little help. And they were glad to do it. And every quarter we would go in and update that cashflow projection, and it got down more into the, this is the details, but they love seeing the details.
One thing I’ll tell you in working with bankers: if you take a cashflow projection that’s five years out, a lot of times they’re just like, they won’t do anything. It’s like, we don’t believe any of that. But if you show them, this is how it’s gonna work. And sometimes that plan is not going to fall in place completely, but you know, you see that consistently billing this much on that job, they feel comfortable with it. And they can see that, you know, you put some time into this and really some effort in there. You’re not trying to snow them, and you’re really not going to run out of cash. Number one, it made the bonding agent and the underwriters happy, and it made the banks happy.
[00:10:04] Stephen Brown: And it stops your temporary cash flow problem because it takes money to borrow money. So cash management is everything because if you have to get a short-term loan from the bank or get into your bank line of credit, that’s a job cost. We talk about how to plan around that. That’s a big part of why you might consider business coaching for contractors.
But also, from a cashflow standpoint, in your fiscal year end, there’s a cashflow statement that comes right behind the balance sheet in there. And to me, it’s nothing that I’ve ever really understood why it’s in there. It shows, Wade, to me as a bond agent, it shows how you came up with the cash at the year end. And basically it’s your income and all the different expenses and the variables, like whether you sold equipment or bought equipment and so forth, and then you get the final cash allocation amount and then it just goes under cash in the balance sheet. But it’s not, to me, something that is particularly useful to plan in your cashflow.
[00:11:06] Wade Carpenter: Not really. No, it’s not. It does tell you where, if you borrowed money or if you’re investing, if you’re getting deeper in debt and that kind of stuff, where did that money go? Where did the cash go? But that’s looking in the past. You’re in the car driving forward, but you’re looking in the rear view mirror at what happened.
[00:11:24] Stephen Brown: That’s exactly what I thought. That’s a good way to put that.
[00:11:26] Rob Williams: Yeah, now on the other hand, though, I think the cashflow statement is- for me, it is a good predictor because really I had not, as I said earlier, that was not a report that I was very familiar with. And it gave me a lot more perspective on what’s happening outside of that P and L that’s probably going to keep happening in the future years that you need to adjust for.
It’s the owner’s withdrawals, those kinds of things. What patterns are we seeing? And we want to get the owner’s withdrawals, but are they taking any, are they not taking any? Are they going to need some? So if you don’t see any on there, you better say, well, where are you getting your money? If he’s not paying himself. It depends on how he pays himself, or herself.
And it does give me a lot of perspective and it shows an area of things you can point out and change. So while it’s not a plan, it is a big indicator for me that was missing on all those things with people that typically just look at the P and L.
What kind of principle are you paying down? There’s another big one. What kind of principle pay downs are you allocating that’s not on the P and L. You may have a really fast one or you may have a slow one that you need to slow down. How is that debt structured?
I know in our past history for the cash flow, our debt structure was probably one of the most important factors that either clobbered us or made us be able to– because most of the time we had a pretty flexible debt structure. And I remember, say the buildings that we owned, and the renewals of those debts, those were the killers for us in the bad times.
The cashflow statement doesn’t directly say that, but you can see where that money’s going out. And planning that debt flow structure so if you see a chain of principal reductions, is that something that’s going to always happen? Can you renegotiate that? Like a home equity Wade mentioned earlier is more flexible up and down, or some kind of a line rather than a structured note.
[00:13:30] Wade Carpenter: Right. Well, I guess this is about cashflow, but I also think exactly what Rob saying that, accounting is history. And you definitely can learn stuff from that. Unfortunately, a lot of accountants are in the business of simply recording history. But when you can take that history and look forward, that is when it’s valuable. I personally enjoy after 30 years of doing this, yeah, I can spit numbers back at you, but if we can sit down and tell you what it means and help you run a better business, grow your business. That’s all what it’s about for me at this point in my life.
[00:14:03] Stephen Brown: Well, it seems to me it’s the more exciting end of accounting.
[00:14:08] Wade Carpenter: Yeah, definitely. And you know, there are definitely, when we’re talking about cashflow projections, there are some quirks to construction that you don’t see in other industries. Retainage is one of the biggest ones, but we have these things like pay when paid clauses, and whether we’re on the receiving end or the paying end of that, there’s a lot of implications. There’s some different accounting, and it does make doing a traditional cashflow statement or cashflow projection harder. And that’s exactly why you need to get down on the job level when you’re doing a projection for a contractor. You can say that all day long, but, knowing when this job is going to end, well, hopefully a month from that, after you do your final bill, you’re going to collect this big retainage check. Well, there’s going to be some huge ups and downs and in cash flow.
[00:14:55] Rob Williams: You know, one thing, I’d be remiss to not talk about receivables. I did talk about loans, and yes, the loans don’t get enough attention. And that was sort of the huge downfall sometime of making sure those loans renewable. That’ll put somebody out. But the receivables is what usually starts that whole downfall. At least in my experience it was. And then it led to some of the other problems of maybe why you don’t get your loans renewed or you have to pay them off.
Let’s talk about the receivables. I know I had a couple of them that were about a year. And the big retainages. The retainages, I know when I went into commercial, some of the guys that I talked to, they’re like, oh, that’s just extra fluff. Just don’t even count on that coming in. It may or may not come in. And just don’t count on that. And that was sort of the guys that, their accounting system was, it goes in my left pocket and comes out of my right pocket. And they don’t even keep up. They didn’t have formal books. They didn’t even have a list of their receivables. And they were just, these are the subcontractors, obviously not general contractors.
But anyway, we get in that cashflow thing. What is the plan if your receivables do get slow? And what is the plan, Wade, to even plan on your growth? And that’s probably the main thing when people come to us or they’re growing out of their troubles, they think, by getting more sales. But their receivables are 90 days and their payables are five days. And we think that’s just common sense now, but most everybody comes to that and they don’t realize that that’s a problem.
[00:16:34] Wade Carpenter: Yeah. I see it all the time too. That’s where most of contractors’ money is tied up. Either the receivables or their WIP. And when I say WIP, that is you got the money tied up in paying your labor, your subs, your materials. And if you don’t get that bill out the door, number one, you’re not going to get that cash in the door.
So it doesn’t turn into a receivable until you get that bill out the door. And too many contractors are very lax on those things. And if you get me started on that one, I’ll start preaching.
[00:17:06] Rob Williams: You know, Wade, that’s a great point. You just pointed out to me that I hadn’t really put that together. I didn’t ever know what WIP is, and for our listeners, that’s Work in Progress if you don’t know what that is. And I didn’t know that term. Was a home builder, we had all this work in progress, but as I said earlier, the banks paid you that and the way these notes were structured, we actually, we had our payables out 30 days, you know, were monthly. And so we actually got a lot of money in. So we weren’t ever concerned about– more WIP, as a home builder, means more money.
It’s opposite when you’re in the businesses usually as a general contractor or a subcontractor, the more Work In Progress that you’ve got, the harder the cash flow is because you don’t typically have a bank inspecting your jobs and giving you all the money. And then in our situation, we had to buy all the lumber. So we had a ton of lumber and it was interesting to me that the banks don’t finance that– or a very low percent. Even if you’ve got it all sitting in a nice enclosed warehouse. That was out of pocket. That was sort of a rude awakening to me that they don’t loan on that. They loan on a completed home, but not on lumber that’s sitting there not installed.
[00:18:22] Wade Carpenter: There’s no value to it until you bill it. A lot of people forget what you were saying. If you’re trying to grow your construction business, number one, if you keep your regular receivables at 30 days and your payables at 30 days, but you got a ton of retainage, well, your real days to collect that retainage may be 70, 80. It’s not uncommon to see that.
And what a lot of people also forget is if you double your company, you want to grow, maybe you’re a million dollar company, you want to be a $2 million company. Typically, you will see your receivables double. And that’s where you got to have the cashflow to grow it. You either have to have financing or a lot of people are not in the place to get financing. So, you need to have a plan, number one. And plan to get there, to be able to fund the growth.
And I could go into it, but there’s a concept in finance called the fundable growth rate model. And essentially what it says is, the only way you’re going to grow is from your personal cashflow or getting it from somewhere else. A lot of people would sit down and say, yes, I want to be a $5 million contractor next year. Well, how are you going to do it by looking at your cashflow? It’s nice to say that in your head, but when rubber meets the road, I guess I would say, then that’s when it becomes harder, because you never figured out how the cash is going to get you there.
[00:19:41] Rob Williams: Yeah. On that, Wade, I think I see two topics of some new shows that we’ll do. The fundable growth rate would be a heck of a thing for a whole episode here. And then the cashflow drivers. I can’t remember if we’ve done a cashflow driver episode or not, but go back and look at it. But if we haven’t, go forward and look at these, because by the time you’re listening to that, maybe we will recorded those.
[00:20:07] Stephen Brown: Yeah, as Wade would say, don’t drive looking in the rear view mirror. Got to look ahead.
[00:20:13] Rob Williams: Oh yeah.
[00:20:13] Wade Carpenter: You’re going to crash if you’re looking, always looking backwards.
[00:20:16] Rob Williams: Yep. Right. That is right. Well, I think this has been a huge episode that we could go on and on. So I think we will plan on having a couple more cashflow episodes. So,
[00:20:32] Stephen Brown: What do people want to do if they want to contact us or ask us a question or give us feedback on the show?
[00:20:39] Rob Williams: One, you can rate us! You can give us a five star rating and then go listen to the episodes. So. Yeah. And then the, I think the comment I know we have blogs and pages and I believe we have the comment sections in there.
They can call us and contact us on email.
[00:20:56] Stephen Brown: Okay.
[00:20:58] Rob Williams: All right guys. Well, this has been the Contractor Success Forum, and we have our wonderful, amazing industry hosts. We have Wade Carpenter, Carpenter, and Company, CPAs, Stephen Brown, McDaniel-Whitley bonding and insurance agency, and Rob Williams, ironGate Entrepreneurial Support Systems.
And don’t forget like Stephen was alluding to, we do have our web page. www.ContractorSuccessForum.Com. So go there, look at all that. In addition to our notes and you can go to the YouTube page, Stephen, and we do have comments on there too. So when —
[00:21:36] Stephen Brown: There you go. Now we’re–
[00:21:37] Rob Williams: It’s a good place
Now, yes, you can go see us Contractor Success Forum on YouTube, and you actually get to see our lovely faces and find out that we’re not really 30 years old. So uh..
[00:21:50] Stephen Brown: Hey, the main thing is you’re a profit strategist.
[00:21:53] Rob Williams: That’s right. A profit strategist!
[00:21:56] Stephen Brown: I love it. Like a superhero.
[00:21:58] Rob Williams: All right. Y’all have a great day and come back to our next show and make some comments.