Managing the Winter Cash Flow Blues

Have you ever put on lipstick to kiss a check?

Well, I have.  There were a few times that a check showed up from a beloved customer just the moment we needed it.  During those times, I whipped out my lipstick and kissed the check and then ran it to the bank.

In the construction industry the winter months are often the hardest on cash flow.  We find ourselves with vendors and employees to pay, but there doesn’t seem to be enough cash in our flow to go around!   Business may have been great all summer, and the bottom line shows a profit, yet we still have no cash.  

The trick to good cash management is taking a hard look at the cause so that you can plan around it.  There can be multiple reasons cash is tight, such as:

1. We had taxable income that we were trying to get rid of before December 31.  Our tax accountant encouraged us to buy assets, pre-pay expenses, or spend money.  Although this is a great strategy for tax purposes, it can make the cash flow winter blues worse.  Careful preparation and planning may be necessary to determine which of the two you will serve: Taxes or Operations.
2. We have less work in the winter.  There are years when this is not true or climates where winter doesn’t prevent work, but for us in the Midwest, winter can be a time of scarcity.
3. We had net losses, as opposed to net income, in the prior year.  A year with job losses puts a dent in cash flow. I often describe it as a hole we dug in the ground and now have to fill up with profit.  You have to earn your way out of it.
4. We have jobs that are slow to start.  Managing cash is about the perfect blend of profitable work with payment terms that allow for timely receipt and payment of suppliers and subs.  In the late winter, early spring months, work starts, but not fast enough to generate billings to support the cash needs of the business.
5. We have retention.  We can have great jobs, with great profits and it’s all tied up in retention.  Many times our profit is in retention and in the winter months, we need that cash in our bank, not on our accounts receivable.
6. We have the wrong mix of debt.  Many times we realize the effects of our debt structure this time of year and find ourselves visiting with our banker friends about some relief on our monthly payments.  This is a great time to visit with our banker, but more to plan for the coming year and not to fix the current problem. Our banks need time to pull together documents, resources and paperwork, so they can’t help us quick enough. 

If you can relate to these issues, you’re not alone.  The good news is now is the time to prepare. Your mission this month is to plan your cash needs for the coming winter.

1. Prepare for the winter with a budget for year end.  Year end is often the time for bonuses and parties and spending.  Planning for this spending in the budget (see our February mission) will help keep costs in line with expectations.  
2. Create a system for managing retention.  Retention management starts at contract review.  A contract is an agreement between parties. This means as a part of the contract, you have a right to ask for what you want.  If you don’t ASK, you don’t GET. Can you reduce the retention in the contract? Can you stair-step it down as the contract proceeds?  When will you finish the job and when will retention be billable? Can you put it in the contract? Sometimes you can. Sometimes you can’t.  Knowing what makes for favorable terms for your business can make a big impact on your cash flow.
3. Prepare your billing streams on the job early.  Can you bill for mobilization? Do you need to order equipment/material early to have it arrive in time?  Remember the project is not your building, but your customers. You are a contractor, not a bank. When you do detailed, per job planning, you can see what will happen to cash well in advance and can make a plan to fix it.
4. Understand your fall/winter workload and billing projections.  Forecasting your workload, billings, payments, and overhead will enable you to prepare for the leaner times ahead.  If you are a part of our Atlas Growth Model, you know what to expect. If you’d like to learn more about our forecasting tools, click here.
5. Negotiate terms with your best vendors.  We all have key vendors and subs that we can’t live without.  Visit with them. Talk about pricing, terms, and processes to make sure you keep your relationship in good standing now.  When winter comes, you will be ready and no one on your team feels left out or caught by surprise.
6. Consider use of credit card/purchase cards.  Using credit cards works when you have a plan of paying them off each month.  Strategic use of the cards can get you rewards and sometimes a 30 buffer on the right account.

Start your planning today.  You’ll be thankful you did!  

If you’re interested in taking control of your cash flow and improving it, we have a full course on doing so called Cash Flow Control. If you’re interested in learning more, click here.

Talk soon.

Melissa