Michael McLin, managing director at Maxim Consulting Group, works with construction-related firms of all sizes to evaluate business practices and assist with management challenges. McLin's experience in the construction industry spans nearly 2 decades. McLin is a nationally recognized, public speaker and published author. Visit maximconsulting.com.
Many companies struggle to create a culture that stresses the importance of cash. The processes and metrics that drive accountability to those responsible for its timely collection are rarely in place. The current accelerating growth of the industry since the economic downturn makes cash more important than ever. The risk associated with growth is real, and your sustainable growth rate is directly related to the health of your company's cash flows.
Despite the importance of a company's cash position, few take the time to produce a statement of cash flow each time the balance sheet and income statement are produced. Even fewer produce cash flow projections based on their WIP reports. Both of these should be produced and reviewed regularly as a part of your monthly financial package.
While monitoring cash flow at the corporate level is certainly a critical tool, a more proactive approach to managing cash flow can be found at the project level. In order to accomplish this, financial training must be provided to the employees who can affect the greatest change—your project team. When examining the types of fiscal responsibility that are bestowed on project managers, you must also examine the tools with which they have been provided to most effectively do their job.
Schedule of Values
In many organizations, little attention is paid to the schedule of values (SOV) that is generated by the PM. This creates an enormous missed opportunity. Financially savvy companies use standardized processes to ensure that the ability to be cash flow positive exists earlier in the project. PMs need to understand that their goal is to define a revenue recognition strategy that ensures a good cash position for their projects. If the SOV is front-loaded "as much as you can," you are completely missing the boat. Project teams should be held accountable for a standard percentage of front-loading for each SOV.
Billing strategies can often be a challenge for contractors. To ensure that billing occurs timely and accurately, define your billings process to include the following components:
- Reviewing all of the existing costs for labor, material and direct job items
- Identifying any additional costs to be incurred prior to the month's end
- Evaluating the percent complete of the billing item
- Marking up each corresponding billing item with a predefined, minimum percent
- Verifying that the total billing amount meets or exceeds the following equation: (Percent complete x contract amount) + Underbillings + 10% of cost
- Meeting with the client to ensure that he/she understands and agrees with the billing and amount
- Ensuring that all required documentation has been submitted as required by the contract
There is often a culture clash between accounting and operations when it comes to collection processes. However, if the steps are defined and assigned to the appropriate person, the potentially adversarial relationship tends to dissipate, leaving timelier collections and a better cash position. Understanding the cost of capital under 30-, 60- and 90-day terms will reinforce the need for a strong, consistent collection escalation process.
Learn From the Experts
Well defined processes for schedule of values, billings and collections are critical to ensuring your company has the cash flow necessary to successfully compete in the growing construction market. Depending on your company's needs, it may help to find a consulting group that will facilitate a discussion with a general contractor, specialty trade contractor and a qualified accounting practice to identify the tools and techniques that allow contractors to accurately manage and control cash flow.
The Construction Financial Management Association (CFMA) Annual Conference & Exhibition will be held in San Antonio, Texas, June 25-29. Register at cfma.org/conference to make a difference in your company's bottom line. For more information, follow CFMA on Twitter, Facebook and Instagram with #CFMACONF16.