1	Project Billings & Maintaining Positive Cash Flow
2	Now open your wallet … Take out the largest bill in your wallet Put it in one of your pockets Now don’t touch it for about 94 days What does that cost you? In real dollars? In opportunity cost? In other ways?
3	Cash Flow …A Short Intro Cash is King! …but what is cash? Cash = checks, credit, accounts receivable
4	Cash …So what do we need it for anyway? Meeting normal day-to-day obligations of the company such as: Paying hourly and salaried employees Purchasing materials Paying for overhead items: leases, advertising, utilities, speedboat …
5	Any other uses for cash? Precautionary reserve for unexpected situations or problems Potential investment opportunities
6	A rose by any name … Cash cycle, cash flow, operating cycle A continuous cycle of events that take place in your firm which increase or decreases the cash balance of the business
7	So what eats your cash? Ex-spouse? Kids? Hobbies? (just kidding!) How about these things: Materials & inventory (gasp!) Supplies External services Paying those accounts payable (AP) … do we really have to pay those suppliers (yes!)
8	Okay, so how do we get more of that mean green? Collect that money owed from customers When you get those customers to pay up AR goes down and cash goes up Get rid of that inventory – sell it off!
9	So what’s the problem on the intake side of this pump? Take a guess at the average pay cycle for the subcontracting industry… How about 54 days Is that what you signed on for?
10	Well then, what’s the problem? Failure to vigorously negotiate favorable payment terms in contracts Contingent payment clauses Lack of well developed, pre-planned strategic project billing strategy Failure to sell each monthly pay request Failure to process the payment application Cash sucking change orders
11	Any other problems (as if those weren’t enough!)? We’re terrified of making dad mad! We don’t really recognize the cost to our firm of non-strategic cash flow management.
12	Cash flow = Lifeblood Cash flow planning is the key How do you plan your cash flow now? Should be part of the firm’s strategic financial management practices Will ensure profitability & solvency
13	Cash management: Where’s the money? Two goals in managing your firm’s cash: Minimize the total cost of holding cash while maintaining sufficient liquidity Okay, I’ll bite, what the heck does that mean? Make the best use of the availability of cash How?
14	Three Components to Cash Management Know what your firm’s cash usage looks like Corporate Project Determine the firm’s optimal level of cash Optimize the availability of the firm’s cash
15	So what’s your current cash usage? We need to determine how our firm is presently using cash To do this we need to use the cash cycle and turnover Cash cycle: the amount of time between the point when the firm pays labor and purchases materials to the point it receives payment for those goods and services
16	Cash cycle The amount of time between the point when the firm pays for labor, materials, equipment … to the point where the account receivable from the sale of our services is collected
17	What?? Cash cycle = Average age of inventory (we don’t have any) + Average collection period – Average payment period For example: We have no inventory It takes 54 days to collect our monthly progress pmt We pay our suppliers within 25 days Cash cycle = 0 + 54 – 25 = 29 days
18	Your turn…figure out your average cash cycle Cash cycle = Average age of inventory (what’s the average age of your inventory in days?) + Average collection period (from our customers)– Average payment period (to our suppliers) CC = I + CP – PP (all units are days) Everybody have a number?
19	So what does that mean? It means our cash is tied up for 29 days on average (so tell me something I don’t already know!) Why is this important? This means you are in constant need of cash. How much?
20	Cash turnover Cash turnover tells you how often this cash cycle occurs. To maximize cash flow, you want turnover to be high. Formula for cash turnover is: Cash turnover = 360 days / Cash cycle If our cycle is 29 days, then our turnover is about 12.4 times per year So what?
21	Your turn, again! Cash turnover Your CT = 360/your CC Okay, so what’d you come up with? What does that mean? (psst…high numbers are good!)
22	Optimal levels of cash We need cash to make payments as they come due and to have a margin of safety for unplanned events, so we need to determine our minimum operating cash (MOC)
23	Minimum operating cash (MOC) MOC = Total annual operating outlays / Cash turnover For example: If cash turnover is 12.4 times If total annual operating outlays are $3 million Then MOC is $242,935 ($3m/12.4)
24	So what’s your MOC? Your MOC = Your annual operating budget / your Cash Turnover (CT) So what’d you come up with? So what? What does this mean?
25	So what? MOC says that in our example, the firm requires roughly $250,000 in cash as a minimum for each period (cash cycle). If you have less than $250,000 on hand you will run short of cash – it’s time to arrange a bigger line of credit If you have more than $250,000, you have a cash surplus and should consider investing it after allowing for a margin of safety
26	So how did your calcs work out? Any surprises? Anyone find out that they ought to have more operating capital? Anyone find out they have too much? So?
27	The PHCC Industry Borrows about 3x more than it should Why? How could we borrow less? Change the variables Cash Cycle = Inventory + Average Collection Period – Average Payment Period (to suppliers) Want short CC Cash Turnover = 360/Cash Cycle Want big CT MOC = Annual operating budget / CT Want small MOC
28	Why does this matter? Poor cash Flow is the #1 reason for contractor failure!
29	If we has better cash flow, what sorts of things could you invest in? Other jobs (high margin) Financial instruments There are contractors who make more money every year on their investments of retained earnings than they ever do on their contracts…hmmm!
30	Any special challenges for contractor regarding cash flow? Nature of the business Significant lapse in time from project award, to incurring labor & material costs, to payment Other factors include: Retention Subcontract vs. self-perform Rent vs. buy equipment Timeliness of payment by customer
31	Working capital & current cash needs Looking just at working capital and current cash needs doesn’t cut it in construction because it doesn’t show future cash flow needs It also doesn’t show our ability to handle a cash flow interruption due to a problem on a project Nor does it indicate future cash needs as a result of being awarded a new contract
32	What we need … Excellent cash flow projections Cash flow projection – the amount of cash necessary to handle the anticipated level of company operations, and when the cash will be needed? How do you do this now?
33	What is a cash flow projection? A numerical plan which estimates the flow of cash in and cash out as the construction firm operates.
34	Why prepare a cash projection? To establish a line of credit at the bank before you need the money Bankers don’t like surprises! To identify cash traps ahead of time so that you can take action to avoid them
35	How important is projecting cash flow? Without cash you can’t pay your bills …if you can’t pay your bills, you’re bankrupt
36	First step in maximizing cash flow – Forecasts! Can’t have cash management without accurate forecasts Alternative is the “big pot of money” approach Two forecasts: Realistic scenario (not best case) Worst-case scenario Contingency action plan Negotiating Tips for Improving Cash Flow
37	Cash flow projections Jobs in progress Monthly cash flow projection Jobs sold & booked, not started Strategic cash flow planning, followed by projection Jobs proposed Weighted percentage of expected cash flow needs The company’s ability to supply cash is determined by the combined cash flow of all projects at any point in time
38	Preparing a cash flow projection First, operating schedules must be prepared for each contract When should you do this? Who should do this? Should you share this with anyone?
39	Preparing a cash flow projection Second, cash flow projections for all current and expected contracts should be prepared Finally, a company-wide cash flow projection should be prepared summarizing cash flow for all jobs
40	Job operating schedule Month-by-month analysis of anticipated contract production (how much work we’ll get done), progress billing, and revenue recognition for each contract How do I develop this?
41	Natural outcomes of the estimating process Estimate Schedule Labor Tracking format Cash flow projection Do you do this on every job? How tough would it be? When you’re estimating do you think about the timing of labor, subcontracts, materials & eqp?
42	Job operating schedule Once the job operating schedule is prepared, the job cash flow projection can be completed This projection indicates when costs incurred are expected to be paid and when progress billings are expected to be collected Remember this isn’t Fantasyland … look at your payment history from the specific contractor on this project
43	So which jobs do we do this for? Every contract which you expect to expend resources or collect funds during the period you’re planning This includes: Current contracts Anticipated work Closed contracts with remaining receivable balances
44	How often should I do this? Every single month! Why? Reflect changes in: Contract pricing (change orders) Costs Timing
45	Forecasting Cash Flow Exercise Let’s try it as a group! Project – a small PHC project Your contract = $150,000 Labor = 33% = $ 49,500 Material = 23% = $ 34,500 Equipment = 2% = $ 3,000 Subcontracts = 13% $ 19,500 Job Costs = 8% $ 12,000 Gross Profit = 21% $ 31,500
46	How would you project cash flow in this were your project? Assume an 8 week schedule
47	Okay, where do I start? Create a brief list of construction activities on this project? What are they? Let’s list them… Create a line item forecast of your actual costs Create a schedule of values incorporating your general conditions costs and your markup as part of your construction activities
48	Okay, then what? Forecast cash in and cash out per week using these assumptions: Progress billings are made at end of weeks 3 & 7 Payments are received 4 weeks after billings Owner retains 10%, retention is paid end of week 14 Material costs are paid 2 weeks after work is performed Labor costs, mobilization and general condition costs are paid one week after work is performed Subs are “paid when paid,” less 10% retention An equal amount of work is done each week
49	Your job Calculate & plot the weekly cash outflow, the weekly cash inflow and the weekly overdraft
50	Next? Strategize 3-4 ways to reduce the amount of negative cash flow Manage changes in cash flow on project What kinds of things cause changes in cash flow once the project is up and running?
51	Managing cash flow changes Change orders Late payments Cost of financing Change in payment requirements/strategy with labor, vendors, and suppliers
52	Wait a minute, let’s go through this procedure again: Step #1 – From your estimate, create an allocated budget based on how you’re actually going to build the job Step #2 – Create a labor tracking spreadsheet linking materials, equipment, tools, etc. to labor tasks
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54	Wait a minute, let’s go through this procedure again: Step #3 – Create a schedule reflecting your allocations showing manpower and materials costs as integrated costs Step #4 – Plot your anticipated cash usages on a cash flow chart Step #5 – Replot cash usage anticipating some percentage level for change orders & slow payment
55	Wait a minute, let’s go through this procedure again: Step #6 – Then, and only then, create a Schedule of Values which will allow you to get positive & stay positive Step #7 – During project, replot cash flow for each change that occurs showing costs and cash flow impacts Step #8 – Track actual cash flow from accounting reports, and revise projection monthly for each job
56	Then what? Do this every month, for every job!
57	Company-wide summary cash flow projection Incorporates the net cash flows from all job cash flow projections along with anticipated indirect selling, general and administrative, and financing costs for the company Why include these? What’s it really cost you to work with each client?
58	How often should I do a Summary cash flow statement? Monthly, for a rolling year
59	Okay, so now I have all this information, what do I do with it? For each month, identify net cash inflow or outflow Determine if you have the financial resources or line of credit available to handle the anticipated volume of work If additional credit is needed, a cash flow statement will show when company can pay This eliminates those surprise last minute requests for increases in the line of credit that make lenders nervous
60	How does doing all this help? Provides you with a forecasting tools Gives you credibility with you banker and your bonding company Professionalizes your approach to business Forces you to focus on the cost of doing business, and makes you more selective
61	Forecasting Tips Prepare cash forecasts for a weekly and bi-monthly period. This provides adequate time to adjust planned receipts and expenditures, or seek alternative financing Use an accounting system that provides timely, current information to be used in forecasting
62	Forecasting Tips Make everyone accountable for cash! Estimating, purchasing, foreman Everyone must provide input, and recognize how their actions impact cash flow
63	Utilizing Projections as a Management Tool Cash flow projections answer the questions: Do we need to increase our line of credit? What if we negotiated extended payment terms from key vendors? Can we afford to take the early payment discount form our vendors?
64	Cash Management: Using vendor discounts to maximize your rate of return Should you take a vendor’s discount? It depends If your company’s funds are in a non-interest bearing account, then you should always take them when funds are available When funds would otherwise be earning interest, or when the funds would need to be borrowed, we can use a simple formula to decide. Borrow to take advantage of cash discounts!?
65	The formula ((% Cash Discount)/(Date for net payment-Date for discount pay))x365 days The computed annual rate can be compared to the interest rate that could be earned if the funds were left in an interest-bearing account, or the interest rate that would have to be paid on borrowed funds
66	Example A typical discount: 2% discount if paid within 10 days, otherwise pay the full amount in 30 days. ((.02)/(30-10))x365=.365, or 36.5% Therefore this equates to an annual rate of 36.5%. Unless your company can earn an interest rate of this elsewhere, TAKE THE DISCOUNT
67	Cash Flash! We always have a tough time collecting from our customers in a timely fashion. What if you offered a discount for payment in ten days? Benefits How would you go about determining?
68	Improving your cash flow Best way to insure good cash flow … don’t do work with those who don’t pay on time, or be sure to get paid a premium for being the bank Cost of capital change orders Pre-qualify your customers and their clients! How?
69	Improving your cash flow Communication up-front Make sure that you include your payment terms in your proposal as part of your standard assumptions Better yet, include your proposed cash flow requirements for the project as part of your proposal Once you have the job, formally submit your cash flow REQUIREMENTS in order to meet the planned project schedule Communicate changes in cash flow projection caused by project changes monthly
70	Improving your cash flow Stop dropping the ball! How many, other than me will admit that we occasionally are late in getting our billing in by whatever date the G.C. requests When this happens what are the consequences? Don’t ever just submit your monthly billing … get out there and sell it every month!
71	Improving your cash flow Offer deals Penalties Cost of capital changes Increase bid price (then offer discount) Credits Discounts for early pay
72	Improving your cash flow When they’re late it’s business, get to it immediately! Polite, firm, no nonsense If the person you’re talking to can’t tell you when to expect payment ask to to speak to someone who can Request a specific date when your money can be picked up
73	Negotiating Tips for Improving Cash Flow Negotiate reduced retainage At least as good as the G.C.’s terms Eliminate belt & suspenders approach
74	Negotiating Tips for Improving Cash Flow Use reasonable front-end loading techniques Remember, front-end loading has the consequence of producing negative cash flow at the end of the job
75	Negotiating Tips for Improving Cash Flow Coordinate billings with estimating and purchasing to match cost and purchase commitments on the job with billings
76	Negotiating Tips for Improving Cash Flow If progress billings are based on costs incurred, considering ending the month a few days early, or estimate the billings through the end of the month
77	Negotiating Tips for Improving Cash Flow Familiarize project managers with the requirements of the contract so that contract change orders will be recognized and billed
78	Negotiating Tips for Improving Cash Flow Create a project manager incentive program that rewards collection of old receivables, and punishes failure to collect final payment
79	Methods to Improve Project Cash Flow Work efficiently Performing better than your budget obviously costs you less cash, plus you get the added benefit of being more profitable
80	Methods to Improve Project Cash Flow Submit pay applications on time Can you afford losing a month’s worth of cash?
81	Methods to Improve Project Cash Flow Schedule major material deliveries at the end of the pay periods Minimizes time between when you pay the vendor and when you get paid
82	Methods to Improve Project Cash Flow Request a mobilization payment GCs understand this … it’s the game they play Become much more aggressive about getting compensated for your planning & mobilization Ask yourself, is it free to me, if not, then charge!
83	Methods to Improve Project Cash Flow Negotiate lower retainage, shorter payment lag, more frequent billing, and payment up front Eliminate the “it can’t be done here syndrome in your own mind!
84	Methods to Improve Project Cash Flow Make repeated requests for late payments Be professionally persistent by phone, by mail, and in person
85	Methods to Improve Project Cash Flow Join forces with other creditors/contractors
86	Methods to Improve Project Cash Flow Notify the GC that you will stop work until you are paid, and mean it! Use your contract as a management tool
87	Methods to Improve Project Cash Flow Protect your lien rights by actually filing them!
88	The Bottom Line… To manage your company professionally, you MUST … Forecast, forecast, forecast Continuously implement strategies designed to maximize cash flow … so don’t delay, start today!