Cash Management for Construction Companies
By: Tiffany C. Wright

Part 2

One way to mitigate the cash outflows is to get terms from your suppliers on your materials and supplies. If you can get 30-45 day terms, you can reduce both the amount of the negative cash flow and the length of time cash flow is negative. Another way is to use subcontractors instead of trade personnel and subject them to the same payment terms you are under with the contractor.

Thus, instead of paying tradespeople every 2 weeks, you pay the subcontractor within 30 days of the submission of the invoice. In both these instances you align your cash outflows with your cash inflows as a way of negating or minimizing negative cash flow.    

Of course, many subcontracts stipulate that a certain percentage of the work must be completed by your company which thereby places a defacto limit on the amount of work you can subcontract. In addition, quality and safety are often a concern when you utilize a high number of sub-subcontractors whose performance and sourcing you cannot directly control.

Shoddy work leads to missed completion dates and additional expenditures tied to correcting mistakes. Consequently, over-dependence on sub-subcontractors can lead to cash flow shortages and other operational issues. This is yet another reason for the demise of some subcontractors while carrying out a contract.   

A line of credit can help you weather cash shortages by leveraging working capital. Working capital is short-term assets – short-term liabilities or typically cash + account receivables – account payables – payroll payables.

You can use your line of credit to pay payroll, rent equipment, or purchase supplies when you cannot get terms. If you do not have a line of credit with a bank, pursue one. Cultivate a strong relationship with a banker at Vice President (or equivalent) level and above.

In these economic times with the credit market roiling and many banks dealing with issues in their own lending portfolios, strong relationships play an even larger role in obtaining credit than a year ago.   

You can also pursue a line of credit with an accounts receivable financing or factoring firm. These charge much higher rates than banks but often are a good source of capital if you are growing significantly or garner a much larger contract than is typical for your company.

Banks use your company’s three-year historical performance to provide credit lines so large increases in revenue over a short period often do not translate into a credit line increase for a few quarters. A receivables financing firm will provide a line based on your historical financials and the credit-worthiness of your customer. Unfortunately, since construction contracts and the attendant receivables often have the retainage provision, many receivables financing firms do not provide credit lines to construction companies.

When they do, it is often at higher interest rates to compensate for the higher risk. Rates can be as high as 4-6% per month – assuming a 30-day payoff on the receivable – which is 48-60% per year!!! Sometimes you have to take what you can get but do so only for very short periods with a plan of action to obtain other financing at much better terms within the next 4-6 months.     

To summarize, cash is king always but definitely in restricted capital environments. Money is still available but it takes longer and requires more creativity and perseverance to access it.

Therefore, plan your cash needs and budget your cash resources as much as possible. Know your daily spend rate, be able to quickly determine how much cash you have on hand at any given time, know your expected operating cash flows and the timing of those cash flows. If you do not, you are headed for trouble. Or you may already be troubled –stressed out, continually seeking money from somewhere, continually trying to increase revenue even though you lose money with each sale.

Stop, determine your cash outflows and inflows on a per project basis, and make decisions based on that information. In this market, you may have to jettison slow-paying, high complaint customers. When cash is king, these customers drag down your bottom line.

Article Source: http://www.articlesbase.com/fundraising-articles/cash-management-for-construction-companies-757759.html

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