Construction Cash Management Tips

Construction contractors, whether large or small, have a unique set of challenges when it comes to running their businesses. At Lutz, we work with a number of contractors and are able to see from an outside perspective what these challenges are and how to best navigate them. As the low-interest rate environment and government programs (PPP Loans and Employee Retention Credits) come to an end, it is important to refocus on cash management. While many businesses tend to reinvest any earnings directly back into the business in the form of buying equipment, hiring more staff, or improving infrastructure, contractors need to consider the following: 

Bonding  

Unlike other industries, construction contractors always need to be aware of their bonding capacity. A bonding agent is always looking at a contractor’s working capital ratio as well as debt to equity when they are making their bonding capacity decisions, and cash is a major factor in both of these ratios. 

Seasonality  

More than other industries, construction is heavily influenced by nature. Whether your company is completely seasonal (such as lawn care) or is dictated by weather (concrete, for example), you need to make sure you are accumulating cash when your crews are able to work to account for shifts in the weather you did not anticipate. 

4 Important Cash Management / Bonding Capacity Tips:

1. Understand Your Contracts

Know how your contracts are written —especially when it comes to payment submission dates. How long is your billing process? 30-60 days is relatively standard in the construction industry and should mean that cash is coming in on a regular basis. However, you must make sure that your staff is billing at the correct time and submitting proper documentation. If they miss the submission dates, you will likely have to wait until their next scheduled payment day, therefore causing you to carry accumulated construction costs for the next month. 

Another important aspect of your contract is mobilization costs. Are you charging your customers for the time it takes you to set up a project, or are you trying to recoup those costs throughout the project or at the project’s end? Charging for mobilization costs upfront is a great way to improve cash flow. 

2. Watch the Distributions

Many contractors make the mistake of paying out a large percentage of their profits in the form of distributions instead of letting that cash accumulate in the company. While owners should certainly be getting paid a fair wage and taking money out to account for tax estimates, problems arise when they take out excess distributions and decrease their company’s working capital and bonding capacity. 

3. Don’t Pre-Pay if it isn’t Necessary

Many contractors think they are getting ahead of the game if they pre-pay costs such as insurance bills upfront or materials to earn a discount. However, if you’re pre-paying a bill for the upcoming year, you are probably doing yourself more harm than good. A bonding company will consider that money already spent and will no longer consider it an asset. Better to pay the bills when they come due or at least wait to pre-pay until the first of the year. 

4. Keep Year-End in Mind

Your bonding company wants to see that your business is liquid when it comes to year-end. That means, if you have a large purchase to make, it may make sense to wait until after year-end to do so. For example, if you are looking to purchase a large piece of equipment, you should consider holding off until after year-end, as this could affect both working capital and debt-to-equity ratios depending on the terms of the financing. Waiting until after year-end can make a big difference when it comes to bonding capacity. 

It is also important to point out that each individual company’s tax situation is different, and in certain circumstances, it may make sense to pre-pay items or make purchases at year-end. Understanding the balance sheet considerations of tax planning is very important. If you have additional questions, contact us. 

Understanding the unique needs of your construction company is important and one of the areas we specialize in at Lutz. Keep bonding and seasonality constantly in mind, and always remember this phrase: CASH is king. 

Contributor: Clarke Beller