by John Chaney
[Editor's note: The following blog post originally appeared on DexterChaney.com. It is the first in a series of industry and business insights that John Chaney will be sharing on Construction Dive over the next four days.]
Cash flow is an extremely hot topic for any type of business. A few weeks ago, I bumped into a friend of mine who is the controller for a local construction firm. While talking, I asked her to name the single biggest issue she’s facing. Without hesitating, she said “cash flow.”
For most industries, there is risk but predictability in cash flow. This is less true for construction. Contractors face an environment in which not only is risk present (and these days quite high), but it is much harder to predict and control. Over the next few days, we’ll take a look at some of the elements that make it difficult to manage construction cash flow starting with estimating and income verses outgo.
The Guesstimate
I’ll never cease to be amazed at how construction estimators take mind-numbingly complex construction projects with hundreds of thousands of elements and boil it down into a cost estimate that turns out to be incredibly accurate. But even the best will tell you that there is still a scary amount of intuition and guesswork, though not because of a lack of process or knowledge. No matter if a contractor uses Excel spreadsheets or specialized construction software, they simply can’t “know what they don’t know.” Change will happen – material prices will fluctuate, labor availability will change, even the weather can conspire against the best-laid estimates.
Burning Big Logs
The best analogy for construction cash flow I’ve heard came from a CFO of a General Contractor we work with. Paraphrasing, he said “John, it’s like burning big logs – you get a campfire going with small sticks that are easy to gather, then you start putting in big logs to keep it going. The big logs take time and effort to find, so if the fire starts burning low and you’re about out of logs, you’re in trouble.” In construction, cash tends to come in large chunks but is burned at a steady pace. Managing cash in this environment takes the right mix of skill, tools, and constant diligence.
What tools are you using to manage cash flow?
Make sure to read Part 2 of "Negotiating the cash flow minefield."
John Chaney, CPA/MBA, co-founded Dexter + Chaney with Mark Dexter in 1981 after working together at the Seattle office of Arthur Andersen & Co. They decided to form their own company after determining there was a market need for construction management software for construction companies with $1 million or more in annual sales.
John is an active member of the Construction Financial Management Association's Puget Sound chapter and is a former member of the chapter's board of directors and a former chairman of its Academic Scholarship Committee. John is an industry leader in the design of construction management software, and is a frequent contributor to major industry magazines. He earned his Masters of Business Administration from University of Washington and his Bachelor of Science from University of the Pacific.
