7 Deadly Mistakes Construction Businesses Make
2. Ignoring Your Cash Position
Knowing your cash needs beyond today is another way of saying “Cash is King”. If you have a basic plan of how you make money with accountability links, then cash planning will become your guide to success. For every client we engage, we establish a business plan that represents the “translation” of the revenue and profit plan into cash flow planning to make it “real”. The plan answers many questions such as: When are large expenditures due? Does the bank line have to be cleared for 30 days each year? Is principle reduction on debt larger than depreciation, or visa versa? What are the expected and manageable terms of our revenue billings? What can be done to increase cash now and each week? Many of our new clients are “profitable” but cash poor. Beyond the clear changes they need to make to increase their profit, cash must be addressed up front for each, or it is all just paper money.
Knowing how to manage to the needed cash flow is essential. Just as each of you manage a job, service contract, or service call to ensure labor and material control and accuracy in billing, so too must cash be managed. You must resolve disputes rapidly, contact companies owing you money a week before it’s due to address any needs and confirm the payment date, let them know you care, are on top of your billing/collection process, and that you DO manage cash at your company. Be the “squeaky wheel”, or you will not be paid first. GET IN LINE NOW AND STAY THERE. Watch how quickly your “days in receivables” drops, simply by having a proactive process which involves a clerical position and a team that works for and services the customer.
Don’t hide inefficiencies in your equity strength. Many “old line” companies have large equities and strong cash flow. That position was often described as “idle cash”. Most companies like that are profitable each year, but when analyzing the components of profit, they are often dramatically under performing. When you add up interest, dividend income, purchase discounts from early pay, cash discounts on quantity purchases (because the company has “the cash” to negotiate), and negligible interest expense (because the company doesn’t have to borrow), you reduce the actual profit by that total. Add to that total an “S” company that pays dividends to the active stockholders even though their salaries are below market, the total artificially increases profit. I’m not suggesting changing the strategy of Dividends versus Salary, but don’t be fooled by the Profit and Loss results.
