Cash flow is an extremely hot topic for any type of business. A few weeks ago, I bumped into a friend of mine who is the controller for a local construction firm. While talking, I asked her to name the single biggest issue she's facing. Without hesitating, she said, "Cash flow."
For most industries, there is risk but predictability in cash flow. This is less true for construction. Contractors face an environment in which not only is risk present (and these days quite high), but it is much harder to predict and control. Over the next few days, we'll take a look at some of the elements that make it difficult to manage construction cash flow starting with estimating and income verses outgo.
I'll never cease to be amazed at how construction estimators take mind-numbingly complex construction projects with hundreds of thousands of elements and boil it down into a cost estimate that turns out to be incredibly accurate. But even the best will tell you that there is still a scary amount of intuition and guesswork, though not because of a lack of process or knowledge. No matter if a contractor uses Excel spreadsheets or specialized construction software, they simply can't "know what they don't know." Change will happen—material prices will fluctuate, labor availability will change, even the weather can conspire against the best-laid estimates.
Burning Big Logs
The best analogy for construction cash flow I've heard came from a CFO of a General Contractor we work with. Paraphrasing, he said, "John, it's like burning big logs—you get a campfire going with small sticks that are easy to gather, then you start putting in big logs to keep it going. The big logs take time and effort to find, so if the fire starts burning low and you're about out of logs, you're in trouble." In construction, cash tends to come in large chunks but is burned at a steady pace. Managing cash in this environment takes the right mix of skill, tools, and constant diligence.
What tools are you using to manage cash flow?