By Jimmy Rodefer, The Knoxville News Sentinel
Read Original Article Here: https://www.knoxnews.com/story/money/columnists/jimmy-rodefer/2021/09/22/jimmy-rodefer-construction-profits-wrecked-without-managing-cash-flow/5788578001/
Eyeballing construction activity in and around Knoxville, particularly in homebuilding, can give the false impression that construction contractors are using dump trucks to haul the money they’re making to the bank.
It seems as if a house is being built on every formerly vacant patch of ground or lot. East Tennessee is a destination for transplants coming here to work, to escape colder climates, or to experience a lower cost of living from high-tax tax states. New commercial construction is also taking place, even during the COVID-19 pandemic, though not at the level of residential.
Construction activity doesn’t equate to gilded prosperity, as contractors contend with spiking materials inflation, labor shortages, pressures from COVID-19, and the normal day-to-day grind and challenges of managing the innumerable components of a construction project.
The key — short-term and long-term — to making it work out well? Cash flow, and taking prudent steps to ensure the flow line doesn’t get clogged.
A construction contractor and sub-contractor should act just like buyers looking for a new car: comparison shop, and negotiate payments and terms.
Contractors can get in the habit of purchasing materials from single sources for extended periods of time. But the same quality may be available for a lower price from a competing vendor. Might this interfere with relationships, or even loyalty considerations? Yes. But if negative cash flow threatens a company’s ability to compete or survive, which factor becomes more important?
In such circumstances contractors should try to negotiate better prices from longtime vendors. If they can’t, there may be another vendor who will, in the hope of securing a new and potentially longer-term relationship. If a vendor offers to give a cash discount, approach it warily, as extending payment terms through a credit purchase is likely a better option than reducing your cash position.https://dd9ddc37c5f05f0762641d8be9b2c737.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
With respect to billing, many contractors are surprisingly lax about on-time billing for services. Invoices should be submitted the moment they’re justified; this gives the greatest chance they’ll be paid on time (improving positive cash flow), and gets potential contractor-owner disputes on the table earlier than if billing is delayed. The longer a dispute drags on, the greater the harm to the contractor’s cash flow.Stay connected to news near you.
A weakness that sometimes appears in contractor cash flow strategy and tactics is when key members of the contractor’s team are uneducated in cash flow management. Leaders who understand the cash flow principles and policies are in a better position to spot problems before they become financial crises. A project manager without cash flow training is like an airplane pilot who is expert in taking off and flying a plane, but has to guess at how to make a good landing. https://dd9ddc37c5f05f0762641d8be9b2c737.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
Another factor: budgeting projections. In today’s COVID-19 and construction inflation environment, cost projections can seem like a hopeless task. It’s essential, nevertheless. Without data, and without a data-based plan on which to base decisions, everything is either an opinion or a guess. Missing annual, or even biennial, cost projections, is a blueprint for failure.
Construction projects are unique in that retention payments are often built into contracts, meaning that the owner “retains” payment percentages until the project reaches certain stages of completion. Contractors can try to negotiate terms of retention payments, thus improve project cash flow.AD0:27https://imasdk.googleapis.com/js/core/bridge3.482.0_en.html#goog_176048716https://dd9ddc37c5f05f0762641d8be9b2c737.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
Cash flow is to construction companies what gas is to a car’s engine. There’s a lot more necessary to keep the engine accelerating to profitable success.
Jimmy Rodefer is CEO of Rodefer Moss & Co., headquartered in Knoxville, and with offices in Tennessee and Virginia. Contact him a