Your business runs like a well-oiled machine. You are winning bids. Projects are pouring in. Your clients are happy. Your team is happy. You are on a straight-shot to success…
…and then, out of nowhere, a cash flow crisis hits. Things grind to a halt. You miss payroll. You don’t have the funds to purchase the equipment you need. You are out of cash, out of options. Pretty soon, you are out of business.
In the construction business, a cash flow crisis hits like a wrecking ball: fast, mean and unforgiving.
…So, what can you do to stop it?
Hold on. What is cash flow? And what is a cash flow crisis?
Cash flow is the state of money flowing into and out of your business. When your cash flow is “negative,” it means the money leaving your business exceeds the money entering your business. “Positive” cash flow is the reverse; more money is coming in.
Positive and negative cash flow aren’t “good” or “bad,” per say. On their own, they don’t define the financial health of your business. A healthy business can and will have negative cash flow, at times. For example: as you gear up for a big project, your cash flow is probably negative, because you are purchasing equipment and making other investments in preparation. That is a natural part of the project life-cycle.
However, without the proper management, your cash flow may be negative for too long, to the point where it becomes unsustainable. (That’s when you’re heading toward a crisis.) Maybe you plan too many projects simultaneously, or you forget to account for the delay in receiving payment from a past project. At this point, you may find yourself without enough funds to cover the basic expenses you need to operate your business, and, well… here comes the wrecking ball.
Cash flow is different than profitability.
Profitability is simply the degree to which your business is earning profit. Cash flow, on the other hand, is a measure of survival. It reflects your capacity to cover the expenses necessary to stay in business. This means your business can be profitable for decades, but a short-term cash flow problem (a wrecking ball) can swiftly push you into bankruptcy. That fast, intense cash flow problem is what we call a “cash flow crisis.”
Just like in personal finance, the goal of managing cash flow is to achieve an equilibrium, a balance where you are holding enough money to afford the materials, people, etc. you need to continue operations. Stay organized, balance your flow, plan ahead, and you will maintain that balance.
Of course, that’s easier said than done. Especially in this business.
Cash flow is a bigger challenge in construction than just about any other industry. Why is that?
- Construction companies invest more up-front. Between equipment, payroll and other materials, businesses in the construction industry have to front a large cost at the beginning of each project.
- You may have to wait longer to get paid. Construction contracts can be lengthy. After fronting a large initial cost, you may have to wait a long period for reimbursement, which can make cash flow management difficult, especially when multiple projects are occurring simultaneously. Speaking of which…
- Multiple projects are (probably) happening at the same time. In this business, you are often navigating an entire portfolio of projects, each one affecting your cash flow.
- No two projects are alike. Depending on the project, you will have to purchase equipment, hire new staff and operate on unique timelines. It’s hard to establish a winning formula when the variables are always changing.
- There are many categories of expenses and multiple ways to report earnings. This makes accurately reporting your earnings more complicated (and more critical, since the IRS is carefully watching the industry for compliance).
A cash flow crisis isn’t the only financial wrecking ball.
In addition to cash flow, businesses have to manage compliance, and the government has an entire set of tax laws and accounting rules unique to the construction industry. It becomes even more complicated when your business crosses into multiple states, which, for growing businesses in this industry, will probably happen.
Sound complicated? It is. But you can take action to protect your business. Plan ahead. Be proactive. And, most importantly…
Partner with the right financial professionals, and they will help you navigate the complexities of cash flow & compliance.
You don’t want just any accountant. You need someone who specializes in the construction industry, an expert who understands the laws, the culture and the reality of your work. Better yet: partner with a whole team of experts.
At Klein Hall, we know construction. Our team of business advisors, accountants and Certified Construction Industry Professionals (CCIFP®)understand the financial ins and outs of your industry. We work with you to create cash flow forecasts & projections, keep your filings organized & consistent, and prepare your business for whatever comes next (and yes, that includes a wrecking ball).