Profitability and Cash Flow

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Two Major Components for Success

Construction companies tirelessly pursue next opportunities and projects to win. Estimating, and project management departments are constantly moving from one pursuit to next opportunity, and from achieving substantial completion to starting pre-construction phase of a new project. In the meantime, field staffing schedules are adjusted to maximize efficiency and productivity. We all know that every project faces a hiccup at some point to add more pressure to the team and schedule. We are highly productive, but does business and productiveness equates a short-term and long-term financial success?

Do you know if you are on a path of long-term financial success?

Balance Sheet Management

Not many non-financial stakeholders understand a balance sheet and its importance. Although a balance sheet is a snapshot of assets, liabilities and owners’ equity balance, as a CPA and financial advisor, I believe a balance sheet provides foreseeable future outcomes of financial performance. Managing a balance sheet has a direct impact on the Contractor’s cash flows as well as liquidity performance. Starting off with a cash burn rate for operations and consider additional measures. Some of the examples are listed below:

  1. Timely billing customers – This is the only way construction companies generate and increase cash inflows. Never be late for billing for the services provided. This process is controllable by a contractor.
  2. Seamless collection of subcontractor invoices – Proactively collect subcontract invoices especially for guarantee maximum price or cost-plus contract arrangements.
  3. Monitoring cash inflows and outflows – Monitor cash balance daily and project cash balance for near future for operational purposes.
  4. Proactive receivable balance management – Do not be a financing company for the project.
  5. Release of payables – Rely on accounting and additional system to track payment due.
  6. Line of credit availability – Don’t need to draw but have a line available for a rainy day.

If these steps are consistently followed and implemented, cash flow projection can be easily attained and monitored for a frequency a stakeholder needs to be informed of.

Project Performance and Profitability

We all agree that profitability of a project must be secured at the time of bidding, negotiating and winning, and its projected profitability must cover the cost of running a business: general and administrative expenses. It is not easy to walk away from a potential project when the estimating and operational team poured their mind and effort into winning the opportunity. However, if its gross profit percentage doesn’t cover the cost of doing the business, there must be an incontestable reason to pursue the project such as customer relationship, volume of the work performing with the same customer, and/or the size of contractor.

Secondly, maintaining accurate and timely accounting records is a starting point of measuring performance and profitability of each project. Properly tracking and applying incurred job costs to a right budget line, and if an error was made, who, when, and how the error can be detected without missing an opportunity to pass the legitimate costs to customer billing. Each contractor should have a structured policy, processes and clear training program for team members.

Lastly, preparation of a profit and loss statement is in accordance with the generally accepted accounting principles or required reporting framework. There should be no surprises for a financial statement user such as a lender, or surety after year-end financial statements are audited or reviewed by an external audit firm.

Conclusion

Having a clear understanding of profitability and cash flow positions is the first step of operating a construction company especially for its start-up phase.

if you would like to discuss more about cash flow management, please contact us.

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