Head off trouble by projecting annual cash flow

By Randy Bonnecaze

Cash flow management is the process of planning, budgeting, measuring and controlling the money that flows into and out of your construction business. Among the most valuable tools in this effort is the annual cash flow projection. With it, you can set realistic profitability goals, measure your progress toward those goals and head off trouble before it gets too serious.

Forecast your fixed costs. To get started on an annual cash flow projection, use your general ledger's income and expense account categories to budget cash inflows and outflows.

You'll be able to easily predict many routine fixed expenses such as facility rent due at the beginning of each month or semiannual insurance installments due every year in January and July. Nonetheless, compare previous years' figures to your current projection to ensure reasonableness.

Create a monthly billing schedule. Next, turn to your backlog schedule. For jobs you already have signed contracts for, but haven't yet started, estimate when you'll incur costs as well as when you'll bill for them. You'll likely also obtain work for the upcoming year that, as you're preparing your initial projection, you're not even aware of.

Estimating the timing of these amounts won't be easy. Construction companies often incur costs several months before receiving the actual revenue generated from those expenses. Yet, if you put together a reasonable monthly billing schedule, you can use a systematic collection assumption to estimate the timing.

Granted, actual collections will vary from your assumptions but you should be able to pinpoint a typical cash collection timing period. And when you do, you can then estimate collections for the entire year.

This analysis will help you identify otherwise hard-to-predict cash flow crunches. Even if your work volume is currently strong, you may eventually find yourself struggling through a slow season. In this instance, it will take time to catch up to your typical volume, so having a systematic collection assumption on hand will be important.

Examine other financials as well. Also compare your accounts receivable with your accounts payable. After dividing your current receivables by your total payables, each dollar of payables should have at least one dollar of current receivables to cover it.

A reasonable goal is to allocate $1.50 in current receivables for every $1 of payables. If you dip below this goal, look to submit additional billings or collect past due receivables.

In addition, if you use the percentage-of-completion method for internal reporting purposes, evaluate your over- and underbilling account balances. Billing jobs ahead of when you'll recognize the revenue, triggering a company liability, accelerates cash flow. Each month, try to stay in a net overbilling position to reduce the job revenue collection time frame.

Keep on track. Because none of us has a crystal ball, there's no exact science for predicting your construction company's cash flow. But an annual projection can help keep you on track.

Editor's Note: Randy J. Bonnecaze is a Certified Public Accountant (CPA) with Hannis T. Bourgeois LLP, Baton Rouge.