Congratulations! You’re Broke.

Mismanagement of Cash Flow —

At Direct Surety, we have had the opportunity to work with many successful construction organizations. We’ve also worked with a few not so successful companies that should have been. The main cause of these business flops has almost always been their rocket-like success and then the sudden discovery they’ve run out of operating cash. And we’re not just talking about fragile start-ups either. The big guys fall just as hard and for the same reason: mismanagement of cash flow.

A rapid run up in booking new work (even at top dollar) and then also having to perform this work seemingly all at once (job stacking) will, on one hand, read nicely in the “work in back log” column of any financial report. On the other hand, it has the potential to drain operating cash. Timing is everything.

Let’s revisit the term “job stacking” again. It’s really not difficult to picture. The estimating department is hitting one home run after the next (and throws a few parties along the way), and is also booking one obligation after the next. In doing so they may (rightfully) assume unlimited resources (e.g., labor, equipment and material) to perform the work. The estimators (even if it’s you) rarely have a clue about cash flows, banking or credit lines. Even if they are aware of the timing of these new projects, plans can and do change. As we all know, schedules and work flows shift and, therefore, so does cash. Remember, most construction companies go broke while having their best year.

It’s critically important that an almost constant analysis of cash flows be performed. This means scheduling and forecasting durations of individual projects (on a time-based minimum 90-day rolling calendar) tied out to individual job specific cash demands (weekly at a minimum) and corresponding progress billings and actual cash income cycles. Yes, it’s like trying to hit a moving target, but in reality this is representative of the financial condition of your company. Sound tedious and totally boring? Perhaps so, but your ability to manage cash is the heart of the reason why you’re able to stay in business.

Of course you can’t forget to subtract all those projected costs it takes to run a business called overhead (yuk … unless it includes your own salary!). Hint: The net total of the projected cash-in (you hope) generated from jobs and cash-out coming from overhead, when added to your actual cash on hand, should always be positive. If not, then make certain you have in place a significant operating credit line, or adequate cash somehow in reserve, for short-term (very short) negative cash flow.

And finally, remember, if you aren’t managing your cash, the famous Tao Chou proverb applies: “Success is a fleeting illusion.” The American version of this same proverb is: “Never believe your own press.”