LUTZ BUSINESS INSIGHTS

 

Construction Cash Management Tips + Lutz Accounting

Construction Cash Management Tips

RYAN COOK, AUDIT & CONSULTING SHAREHOLDER

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. One of the biggest challenges we see contractors struggle with is keeping cash on hand. 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.

Seasonality  

More than any other industry, construction is heavily influenced by weather. Whether your company is completely seasonal (such as lawn care) or is dictated by precipitation (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 cash flow 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 project’s end? Charging for mobilization costs up front is a great way to ensure 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’s bank account. 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 cash value 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. 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


Bonding companies want 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 prepay items or make purchases at year-end. If you have additional questions, contact me directly at rcook@lutz.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.

ABOUT THE AUTHOR

Ryan Cook

402.827.2085

rcook@lutz.us

LINKEDIN

RYAN COOK + AUDIT & CONSULTING SHAREHOLDER 

Ryan Cook is an Audit and Consulting Shareholder at Lutz with over 11 years of experience in accounting and assurance and five years in business valuation. He provides accounting, auditing, and consulting services to privately-held companies, with in-depth experience in the construction industry.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
EDUCATIONAL BACKGROUND
  • BSBA in Finance and Accounting, University of Nebraska, Lincoln, NE
COMMUNITY SERVICE
  • The University of Nebraska at Lincoln School of Accountancy, Advisory Board
  • Boys and Girls Club of Lincoln, Board Member
  • Habitat for Humanity's Annual Fundraiser (Brew Haha), Past Committee Member

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