Building a Cash Healthy Organization

The old refrain cash is king still holds true today. Cash is the life blood of the architecture, engineering and construction industry and what enables companies to operate, pay suppliers and vendors, and mitigate risk.

As more customers seek extended payment terms, many companies are facing cash shortages. Having the ability to pay subcontractors on time ensures they are responsive and your prices remain competitive. Client payment delays mean cash reserves are being squeezed.

That’s why it’s critical to make sure you have a balance between your accounts receivables and your accounts payables, plus your accrued expenses. When accounts receivables are greater than accounts payables plus accrued expenses, you are financing projects for customers. That doesn’t mean that you slow down accounts payables or accrued. That is not a good strategy. Just notice the difference. It helps to keep your eye focused on the importance of collections and cash in the bank.

Here are few things to consider in building a cash healthy organization:

Average Age of Accounts Receivable: Know the average age of accounts receivables for the company and individual projects. Educate your people on the impact on the company by collecting accounts receivables one day earlier. The amount of cash that generates is staggering.

          You may consider rewarding early collections. Rewards do not need to be solely monetary. Recognition also goes a long way too.

• To calculate the average age of accounts receivable, first calculate average daily revenue. Here is an example:
  • Average Daily Revenue = Annual Revenue/365 days
  • Average Daily Revenue = $21,206,983/365 
  • Average Daily Revenue = $58,101
• To calculate Average Age of Accounts Receivable:
  • Average Age of Accounts Receivable = Accounts Receivables/Average Daily Revenue
  • Average Age of Accounts Receivable = $2,260,341/$58,101
  • Average Age of Accounts Receivable = 38.9 Days
• If you collected accounts receivable in 36.9 days instead of 38.9 it would free $116,212 additional cash. Image what it would do for your organization. Think about all the positive things that cash could be invested in or to simply have a bit of cushion for future cash needs.

Beat the Drum: Profitable projects do not guarantee positive cash. Many project leaders now understand that cash and profit are not the same. There are huge timing differences involved. Educate project managers on the tactics they can use to get cash positive on their project.

Becoming cash positive starts with the contract, setting up a schedule of values, etc. Even if you cannot get advantageous contractual terms, what strategies can be used to help the process? Overbilling, also known as billing in excess of cost, is one strategy that can help. Teams always need to know where they are on a project from both a cost and production standpoint. The billing schedule should not confuse the actual percent complete on the project. Getting overbilled helps shorten the lag between when costs are incurred and when accounts are paid.

Map the Process: Include billings and collections in the internal project hand-off meetings. Map the process from the customer’s point of view. Know their processes, levels of documentation needed, team members involved, etc.

Start reaching out to subcontractors by the 20th of the month to ensure they are ready with an accurate bill by the time you need to invoice. Then be prepared to follow up with the correct customer contact when the invoice is two or three days late. Do not wait until the following month, or worse, later.

The sooner you bring notice to the missing invoice the faster you will get paid. Find out if they are missing something, need additional information, etc. Following the process diligently from the first invoice sets the precedence of what will happen through out the project. Train your teams to feel comfortable making those phone calls and your customers that paying on time is part of their contracts.

Cash Management is More than an Accounting Exercise: Leaving cash management solely to accounting is a bit like leaving project safety solely to material suppliers. Yes, suppliers come and go on site and are part of the safety network, but the larger impact comes from project teams. Getting cash positive needs to be a key goal of every project team. Accounting supports and helps, certainly. Make cash collections a part of the conversations each month just like billings. Statistically, the longer an invoice sits unpaid, the higher the likelihood that payment will be discounted or left unpaid completely.

Building a cash-healthy organization isn’t about quick fixes or accounting maneuvers; it’s about cultivating a company-wide discipline that treats cash flow as a shared responsibility. When project teams understand the direct impact of timely collections, when billing and documentation processes are mapped and followed diligently, and when leaders “beat the drum” consistently, firms put themselves in a position of strength. Cash will always be the lifeblood of this industry. The organizations that thrive are the ones that manage it intentionally, proactively and collaboratively across every project and every level of the business.

For tips around cash management and other aspects of financial management, check out our construction financial book, “Profitable Project, Profitable Business” to help you manage your construction company successfully.