573: Navigating Construction Cash Flow Challenges, Myths, And Facts

This Podcast Is Episode 573, And It's About Navigating Construction Cash Flow Challenges, Myths, And Facts

In the world of small businesses, positive cash flow is king. The driving force keeps your business engine running smoothly, covering all your liabilities. But what happens when outflow exceeds inflow? Cash flow problems ensue, threatening the survival and growth of your construction business.

These cash flow problems can originate from various sources, including macroeconomic issues like recessions, natural disasters, wars, and microeconomic problems like business decisions and performance. However, careful planning and smart accounting practices can cushion or even avoid these financial blows.

Managing cash flow is a vital part of running a successful construction business. Some contractors think managing cash flow means tracking how much money enters and leaves their business, but more goes into it. 

[Starting Cash + Cash In - Cash Out] = Cash Flow

Contractors and sub-contractors know there is more to profits than shown above, and most of you rely on your "gut feel" to see when the project has made a profit.

Unfortunately, many cash flow myths and misconceptions can lead to poor financial decisions. For a better understanding, how about a mindset shift first?

Myth: Profit equals cash flow. 

Fact: Profit is not the same as cash flow. A business can be profitable but still have cash flow problems. Profit is the amount left over after all expenses are paid, while cash flow is the amount of money that comes in and goes out of the business. 

Myth: Increasing sales will solve cash flow problems. 

Fact: While increasing sales can help improve cash flow, it is not a guaranteed solution. If a business is not managing its expenses properly, increasing sales will only exacerbate the cash flow problem. It's essential to focus on controlling expenses as well as increasing sales. 

Myth: Cash flow problems are always caused by slow-paying customers. 

Fact: Slow-paying customers can contribute to cash flow problems but are only sometimes the root cause. Factors such as overstocked inventory, underutilized equipment, or poor project management can also impact cash flow. 

Myth: Borrowing money is the only way to improve cash flow.

Fact: While borrowing money can provide a short-term solution to cash flow problems, other options exist. Construction businesses can also improve cash flow by reducing expenses, increasing sales, and negotiating better payment terms with vendors and customers. 

Construction businesses can make better financial decisions by understanding the facts about cash flow. 

Let's delve into some common cash flow issues and explore how you can manage them effectively.

Problem: Lack of cash reserves

If your contracting business's revenue drops, having enough cash reserves to cover up to six months of expenses can be a lifeline.

Solution: Project your cash flow by estimating your sales, determining payment timelines, and estimating all expenses. Your accountant can help you create cash flow projections in your accounting software so you know where you stand financially.

Problem: Expensive borrowing

High-interest credit cards and business loans can significantly affect your b