Without good cash flow, it can be difficult to take care of business essentials such as paying employees and subcontractors, purchasing materials or buying equipment. The larger the construction company, the more finance people you may have in place to help you manage this key task. But what you may not recognize is how many people and departments impact a construction company’s cash flow.
Steve Lords has made it a mission to educate the construction industry on this topic. He’s taught courses on cash flow for the Construction Financial Management Association (CFMA), and has taught it at every construction company he’s worked at since he first became involved in construction finance more than 30 years ago.
According to Lords, operations and corporate management typically view cash management as a topic for financial mangers only. Meanwhile, financial managers of construction firms get frustrated because their policies can only do so much to control cash flow.
Lords argues that to be effective, financial managers have to get out of their offices and start educating operations personnel on how their actions impact cash flow. But in Lords’ experience, without top management’s support, their suggestions are likely to fall on deaf ears.
The Largest Numbers on Your Balance Sheet Aren’t Controlled by Accounting
“Take the largest numbers on a construction company’s balance sheet, and you’ll see that accounting really doesn’t have control of these areas,” said Lords.
Accounts receivable and billing is controlled by project management. “They know the jobs better than anyone else, so they control this driver,” explained Lords.
Accounting may establish company standard policies for accounts payable, but Lords says that control is limited. “It’s operations that engages new vendors and subcontractors, and they may arrange different terms than is desired for good cash flow. Operations also reviews, codes and approves job related costs, and may or may not process invoices and pay requests on a timely basis.”
Costs in Excess of Billings (CIE) and Billings in Excess of Costs (BIE) is another area that is largely controlled by operations, since these accounts are the result of ongoing billings and job costs.
According to Lords, although the finance department may arrange financing for new equipment, they typically don’t authorize equipment purchases, and they don’t manage and monitor the efficient use of equipment on the jobs. Again, this is usually a management and operations function.
Surprisingly, few accounting people are involved in reviewing contracts before the job is bid and awarded and the contract signed. When he asks the question in educational sessions, Lords says fewer than 10% of companies have finance review the contract terms.
Take Time to Train Non-Financial Managers on Cash Flow Principles
The solution is education, but in order for that to be effective, Lords says top management needs to incentivize operations. “In most construction companies, the controller or CFO does not have the clout to require cooperation in the training and implementation of cash management policies and practices,” said Lords.
One construction company where Lords worked required operations managers to pass a test on the company’s financial statements in order to receive some portion of incentive bonuses. Lords says it was extremely effective.
Unfortunately, it’s difficult to track a single metric that shows the impact of better cash management. Instead, Lords points to the overall success companies are able to achieve when everyone is working toward the same goal.
Whether your business is growing or contracting, good cash management will put your company in a better position to succeed.
“If you do the right things, and you do them well…and consistently, good things will happen,” said Lords. “Those good things will include both stronger cash flow and increased profits.”
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