There is an old adage true to every business and that is ”CASH IS KING”
Richard Branson too, famously quoted once that “CASH IS THE LIFE BLOOD OF ANY BUSINESS”. Negative cash flow is the No. 1 reason why a contracting business could become insolvent. This is especially true for a project based business. Where cash flows may not only be unsteady and non uniform month on month, but can also be very erratic sometimes
As a mechanical contracting business owner, there are many balls one has to keep in the air at the same time. So what are the steps a contracting or construction business owner can implement to manage cash better to make the business sustain, grow and thrive. We have already recorded an interview with Leah Gutmann of First First Forward Consulting LLC . You can listen to Episode 004 of our podcast to know more.
Here are a few main points from the discussion.
- Create Realistic Estimates- Estimates need to be realistic and always keep a cushion, so your net margins are not eaten away. Let your inside and outside sales team and sales persons know this and internalize this and practise this. Make these discussions an integral part of your sales meetings and reviews.
- Plan your Projects Meticulously- Planning can never ever be underestimated.Though not everything may always go as per plan, still always strive to macro and micro plan and schedule each and every task, activity, WBS, deliverable, to the “T”. with both best case worst case scenarios in mind.
- Create Forecasts and Budgets. Again those need to be realistic. Do weekly fortnightly or monthly reviews of the actual Vs estimated numbers. Your Project Managers need to be on the top of their game while doing this.
- Do timely review meetings on projects status, accounting and financial positions of the projects. So timely corrective actions can be taken.
- If possible try to renegotiate terms of contract and payment especially if you have to do heavy cash outgo on buying some costly equipment for the project
- Avoid over and under billings
- Keep an eye on all your project indices and MIS reports- including WIP. The WIP document is a living document that gives a clear position of the projects. But again all data going in the WIP needs to be correct.. WIP does is intricately tied financial statements
- More on **project indices below–Planned Value, Earned Value, Actual Cost, Schedule Variance, Cost Variance, Schedule Performance and Cost Performance Indices
- Be clear on when one can and should recognize revenue in the income statements
- Be on top of change orders and have a Clear written SOP on how change orders will be managed, approved and implemented. Document each and every change request irrespective of whether it will be billed or no.
- Make sure your Accounting and Projects team are working cohesively and not in silos
- Do constant trainings and interventions to improve team productivity, implement 5S, TPS, Kaizen, eliminate all kinds of wastes at all levels
- Train team in Communication, Leadership, Strategy
- As a business owner be transparent and train your team to be transparent about status finances with all your team
To conclude, in order for a business to succeed, and more importantly avoid going insolvent, it is very important to have a proper and healthy cash flow
Monitoring the money coming into the business and comparing it to outgoing cash such as bills, payroll, and other expenditures, is the essence of correct cash flow management. This forms the basis of timely corrective and strategic actions to maintain positive cash flow and ensures that the company can pay its employees and vendors on time and also has funds to invest in its future growth.
Few Useful indices to keep an eye on:
- Planned Value= Planned % completion X Budget
- Earned Value = Actual % compilation X Budget
- Actual Cost = Measure of Actuals Expenses incurred
- Schedule Variance = Earned Value - Planned Value
- Schedule Performance Index = Earned Value/ Planned Value
- Cost Performance Index = Earned Value/ Actual cost
- Gross Margin = (Revenue - COGS) / Revenue x 100
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