Many contractors struggle with cash flow. Although this can be attributed to many factors, admitting you have a problem is the first step to recovery.
Before you can take corrective action, however, you first need to understand where problems are coming from. That's where your construction software reports come in. Here are five reports that can be used to identify cash flow issues before it's too late to recover.
1. Analyze Cash Flow by Job. The sobering reality is that many construction companies are one bad job away from bankruptcy. As each job progresses, it's important to monitor how much cash is going out and how much cash is coming in. Negative cash flow should be a red flag that there is a problem with a job.
2. Monitor Over/Under Billings. Monitoring over/under billings is the key to maintaining a positive cash flow on your jobs. Over/under billings amounts can be obtained by calculating how much should have been billed based on the work you have completed and then comparing it to how much was actually billed. Over billings need to be recognized as a liability (don't buy a boat with your over billings!). Under billings can indicate a future cash flow crisis.
3. Factor in Committed Cost. To ensure that a job stays on or under budget, you need to factor in committed cost. Many job cost reports fail to factor in the commitments made. Subcontracts and purchase orders (POs) need to be put into the picture along with hard cost. Even if you haven't been invoiced for POs or subcontracts, these commitments need to be looked at as future cost on the job. Running a committed cost report will show you the whole picture and identify problems with your estimate early on. A committed cost report will also show you just how much cash you're going to need in the future.
4. Measure Profit Fade. The profit calculated when bidding a job can fluctuate dramatically as the project progresses. Change orders might increase profit while a poor estimate might decrease it. Profit fade needs to be measured on each job to identify problems early enough to make profit-saving corrections. To measure profit fade you need to look at increases in both cost and profit. Ideally, if you see a big increase in cost you should also see a contract increase due to change orders. If the value of your contract does not increase incrementally with cost, you need to identify why. If the original estimate was bad or you've performed extra work that hasn't been billed as a change order, you may be headed for a negative cash flow situation.
5. Monitor Backlog. Your backlog can help you estimate what your cash flow situation might be in the future. Monitoring estimates-to-complete for earnings, cost and profit will put a dollar amount on your backlog. This information will help project growth and also warn you of slow times with potential negative cash flow situations. If your backlog is shrinking, you want to make sure that you bid enough new work for the future.
As you look at the information obtained by these reports (individually and as a whole), you will begin to get an idea of how your jobs are progressing, whether or not you're on budget and how healthy your cash flow is. You can have a job that comes in under budget, for example, that still jeopardizes the financial status of your company by having negative cash flow throughout the job.
Many contractors use credit lines to circumvent cash flow problems - and ultimately spend their profit paying interest. While using a line of credit is necessary in some cases, the more profitable decision is to use your construction software reports to identify problems before you get into a negative cash flow situation. With the right tools and real-time information, you can make informed decisions to secure positive cash flow.
About the Author:
Josh Stearns is Vice President of Sales & Marketing at AccuBuild. He can be reached by e-mail at
josh@accubuild.com or by phone at 800-728-6853 x801.
http://www.accu-build.com
No. of Times this article has been viewed :
793
Date Published :
Apr 24 2009