Many contractors made it through 2020 with a strong feeling that work hadn’t slowed down that much. Construction for certain sectors, like healthcare and public utilities, actually expanded.
Yet as we move deeper into 2021, backlog is becoming a growing concern. According to Associated Builders and Contractors, December’s 2020 backlog was 1.5 months lower than in December 2019. Will contractors have the work they need in 2021 to meet their obligations, from payroll to any debt they may have?
Now, concerned contractors are seriously considering how they can start conserving more cash and increasing cash flow.
The importance of cash management
The very nature of the construction industry promotes inconsistent cash flow, which only makes proper cash management all the more critical. In an uncertain economy, leaders must focus on analyzing the certainty of when cash is coming in, what are payments going out and how they can get liquidity to make payment deadlines.
1. Strengthen your banking relationships
Although the Paycheck Protection Program (PPP), CARES Act and Consolidated Appropriations Act of 2021 have provided liquidity, contractors must ensure their traditional lines of credit and loans are in place and determine whether they have the necessary and correct banking relationships.
When your cash or financial position deteriorates, banks are more likely to restrict your ability to borrow if your relationships with them are weak. By managing these strategic relationships, you can help bankers better understand your business and your financial position, as well as your likelihood of recovery. Banks don’t like to be blindsided by things. Consistent communication and open dialog can go a long way to making sure you have access to surety bonds, loans and other capital.
Make sure to vary your banking relationships, too. You want to have a mixture — from community banks to larger financial institutions — to provide you with different ways of financing and securing collateral.
2. Create solid cash-flow projections
In 2021, a big focus will be on cash-conservation behaviors. These will look different for each contractor. But the most critical and first step is to perform sophisticated cash forecasting and modeling.
This process involves looking at your expenses related to cash, understanding what you need or do not need, and then putting solid methodologies into place to forecast cash out over longer periods. You want to perform forecasting over the long-term — over 12, 24, 36, 48 and 60 months — and include a variety of scenarios. This will let you know how aggressive your actions need to be going forward and what actions to take depending on which scenario you encounter.
Make sure to look at your existing jobs and their probabilities of payments, as well as take into consideration what sectors of construction you are in (because sectors/markets often mean different certainty of payments).
3. Revisit your discounting strategy, credit standards and AR terms
Cash going out is just as important as cash coming in. You want your accounts payable to be as long as possible and your accounts receivable to be as short as possible
For AP, make sure you are tracking payables and their due dates and discount terms. Place payables into two categories: what absolutely must be paid and what can wait. Work with your bank to renegotiate when you make payments or for how much. If you have a key supplier, consider discussing credit terms and discounting. Can you negotiate a discount for some of your inputs and construction materials? Can you find suppliers willing to give you good financing and payment terms? If you have subcontractors, negotiate payment terms so you don’t have to pay them as timely as usual.
Also find out which vendors accept credit cards. By paying with a card, you gain an extra 30 days of interest-free cash.
On the AR side, assign an employee (not the project manager or engineer) to follow up on collections. Have them call on the due date of the bill and confirm that no items such as lien release or insurance certs are the holdup. Make sure to file appropriate liens in a timely manner to preserve your rights.
Finally, if you have outstanding retention balances, follow up why they are still outstanding. It might be an easier fix than you think.
4. Look at labor costs and taxes
In construction, labor is one of your biggest expenses.
While failing to remit payroll taxes is a major issue that carries steep fines, contractors should be careful not to overpay on unemployment taxes. Perform an audit of all the states you work in and make sure you’re consistent with each state’s requirements. This will help ensure you’re paying the correct unemployment tax and monitoring the right unemployment you’re owed.
When conserving cash flow, you can also look at employee salaries and benefits. For example, if you need to cut costs to preserve cash, you might consider turning off your employer 401(k) match temporarily. (You can always retroactively match it at a later date.)
Look at salaries, too. Owners tend to have the highest salaries at a company. Cutting some percentage of this compensation can help conserve cash or allow you to meet other obligations. For other employees, cutting their pay or putting them on a part-time schedule is more of a last-ditch effort to conserve cash, considering the negative repercussions it will likely have, but it is an option.
5. Know your costs
Conserving cash is important, but so is increasing cash flow. Adjusting your bidding can help increase cash flow.
Be careful of stepping into unfamiliar areas right now simply to create backlog. You could easily commit to a project that will end up costing you more than you’ll make. Same with accepting projects with extremely low margins.
It’s critical to understand what a project truly will cost. Having the right technology in place can help you analyze past projects and determine which projects you should pursue going forward that will provide the best return, and which projects have historically resulted in low or lost profits and which you should avoid. Technology can also help you determine how far you are from the bid price to the true cost, find out why this gap exists and then discover ways to close it. Understanding true project costs and only taking projects worth your while are critical elements of conserving cash and increasing cash flow.
6. Work with experts when you need to
Yes, you’re trying to conserve cash, but doing so effectively is what’s going to help in the long-term. Working with specialists now can be very worth it.
For example, if you’re not comfortable with the level of cash forecasting discussed earlier, reach out to your accounting firm for help. They can assist you with better understanding your liquidity and offer you different methods of forecasting.
Experts can also help you with strategic planning and adjusting around your cash-flow needs. They’ll identify and walk you through cash-conservation options and build strategy for achieving them.
Sometimes, it’s all about knowing what you don’t know right now. Do you have a strong controller, finance manager or CFO who understands treasury management? It’s a very different world from accounting and is much more focused on cash. If you don’t have this expertise, reach out to trusted advisor and seek advice on what treasury management should look like and how to do it.
Your trusted advisor can also help you have important conversations with financial institutions, as well as identify different banking relationships to pursue and gain introductions.
Navigating the ongoing impact of the COVID-19 pandemic is going to take a lot of specialized skills and knowledge, as well as time. Having experts on your side to help can make the process not only go much faster and more efficiently but also deliver results you may not have been able to achieve on your own.
Wipfli can help
We can assist you with building strategy around your cash conservation and discovering ways to increase cash flow — helping ensure you’re making the decisions that will have the greatest short- and long-term impact on your business. Click here to learn more, or continue reading on: