Construction Companies in a Crisis: How to Manage Cashflow and Run Lean

December 2, 2020 | Article

Containing costs and managing cash flow is difficult for any business, but the construction industry is particularly challenged. Due to the structure of payment terms, overdue receivables accumulate easily. Plus, nailing the formula for job costing is a perpetual issue that leaves many companies breaking even on projects – or worse.

These issues leave many in the industry on thin ice as far as cash flow, making it difficult to survive any crisis, let alone one that disrupts supply chains, creates new health hazards, and strikes the economy the way COVID-19 has. If you’re experiencing cash flow problems that aren’t sustainable, the key to staying in business is swift and strategic action.

1. Get cash flowing.
In construction, general contractors pay their subcontractors when they get paid, and the money trickles down from there. As a result, construction companies accumulate receivables that are 90 to 120 days overdue. This leaves many operating in debt or near-debt, with payments coming in at a snail’s pace and far behind the company’s output. To rejuvenate your cash flow:

  • Collect. Contact companies and customers that owe you, targeting the oldest outstanding payments. Keep in mind they are likely experiencing disruption and offer a partial payment option to get cash flowing into your business. If you have a good relationship with a customer who is doing well and is able, you might request advanced payments.
  • Extend. On the payables side, talk with your suppliers, vendors, lenders and any others you owe to see about deferring payments and extending payment terms and lines of credit.
  • Negotiate. With current contracts and any contracts moving forward, adjust your terms so that you’re covered enough to stay in business as work progresses. For instance, requiring more substantial incremental payments from a customer throughout a project will keep you from reaching into your own pockets. On the flip side, you might stipulate with suppliers that you don’t pay for materials until you are due payment for them. You might also ask for extended payment terms with suppliers.
  • Communicate. Talk to your suppliers, customers, general contractors and lenders about their issues and potential disruptions that could impact your business. This will be key in planning for various scenarios later. Are they struggling to collect payments themselves? Will this impact their ability to deliver?
  • Reserve. At any opportunity, stow away funds into an operating cash reserve account. Essentially, this is an interest-bearing savings account you create to relieve cash flow pressure from your business. It’s a wish-list item, but one you can contribute a small percentage to with every project.

2. Cover your bases.
While you’re assessing the viability of those you rely on, also assess your own viability – and keep it steady by preparing for any legal action by you or against you.

  • Potential legal action against you. How have you been impacted? Are you communicating that impact to those who rely on you? Are you able to fulfill your contracts or are you headed toward legal trouble? If you have a good relationship with these other parties and keep them informed, you may be able to avoid greater difficulties. If you have to deliver any notifications, communicate and document them formally. Further, see if your contract includes a clause protecting you in such a case as the pandemic. This may mean you can create new contracts and terms.
  • Potential legal action by you. Are severely delayed payments clogging up your cash flow? These are difficult times, but to stay in business, you may need to file liens. In some instances, simply communicating with the customer can get the payments moving. However, in case it doesn’t, be sure you understand the notification and documentation requirements you’ll have to meet before you can file a lien and keep up with them because new requirements may arise.

3. Contain and optimize operational costs.
Construction operations are often busy, and daily activity can keep leadership from identifying unnecessary spending and costs. If you were to look closely at your operational expenses, upcoming projects and fixed assets, you might find you’re losing money.

  • Upcoming projects. Did you have plans to expand your geographic area or purchase new equipment? Can these investments wait until your finances are healthier?
  • Fixed assets. Do you have fixed assets you can refinance to put more cash into your business? Or are there opportunities to rent fixed assets out?
  • Operations. Can you reduce the cost of operations, such as with energy usage, storage, or rent?
  • Personnel. Should you consider layoffs so your employees can qualify for unemployment on their current wage?
  • Technology. Do you use outdated technology that adds steps for your employees? Consider introducing a new technology to solve for tedious administrative tasks.

Cost containment can help construction companies manage and run lean for a stronger future.

4. Improve your estimate accuracy.
Accurate construction bids are an important part of a contractor’s financial health, as many project losses can be traced directly back to bid errors. Poor job costing and estimating practices often lead to low bids that don’t bring in enough cash for the business to survive. Again, if you add in a crisis like the COVID-19 pandemic, survival gets even more difficult.

Take the time to perform thorough comparisons of actual vs. estimated project spending to determine where you need to control costs. Then, to discover the reasoning behind these comparisons, analyze them and your process:

  • Have you supplied consistent processes for your estimators to use for job costing?
  • How often are poor estimations due to costing errors vs. real-time issues?
  • Are your estimators accounting for all expected costs associated with a project?
  • Are estimators taking shortcuts?
  • Do certain jobs or tasks never turn a profit?
  • Do certain jobs or tasks consistently turn high profits?
  • Do you use a software with up-to-date functionality that supports accurate job costing?

Put your findings to work immediately in all upcoming project estimates.

5. Keep up with taxes, loans and relief.
Governments and business associations are constantly making updates as they adapt to the COVID-19 pandemic. Plus, all business owners know that even in less challenging times there are constant changes to keep up with as far as tax filing and payments, loans and more. Understanding these changes will help keep cash flowing, and loans and relief may be key to staying operational. Also, consider taking advantage of the research and development (R&D) tax credit to improve cash flow. Innovative construction activities, such as those that improve products and services, qualify. And relevant wages and supplies qualify as expenditures.

Do you need a guidance around different loan programs or internal calculations?

Contain costs and improve cash flow to fortify your business.
Taking these steps to speed up slow cash flow, contain unnecessary costs, improve on inefficient processes, and take action toward a more sustainable financial model, are key to making it through when the future is uncertain. They’re especially important when you’re operating a business through one of the worst potential scenarios. Once you have a plan for a healthier, more stable cash flow, the next step is to forecast multiple scenarios that might happen in your business in the coming three to five years, and then to document plans of action for each to ensure you’re prepared for best- and worst-case scenarios in the future. Such business continuity planning is essential to a secure future for your company.

In times of uncertainty, you must thoroughly assess your financial and operational conditions before you take any action. Knowing where you stand today will help you pinpoint the exact actions that will get the best results for your business. To start, ask critical questions about pre-existing conditions, and identify inherent risks like outdated technology, supply chain disruption and inefficiencies.

Get our step-by-step guide to containing costs and managing cash flow in the wake of COVID-19 to navigate this pivotal process.

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