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best practices for managing cash flow year round

Jon Zeiler

A balance sheet and income statement do not tell the whole story. Managers of construction companies must be monitoring and forecasting cash to make the most informed managerial decisions and properly plan for cash flow needs and surpluses down the road. As the saying goes "Cash is King!". There are many ways to forecast your cash and historically its been quite the manual process. However, many construction specific ERPs and F, P & A software now provide the technology to make the process much more efficient and effective. 

Cash flow projections is not just something you do occasionally. Best practice is to make it a continuous process that is constantly updated for new factors and information. The best tends to be a rolling 13-week forecast that is updated weekly or bi-monthly. These forecasts will include both expected sources and uses of cash from operations. Operations should be projected at the job level if possible, for best results. After operating cash is projected than management can use those results to make investment and financing considerations. These considerations include purchasing equipment, paying down debt or LOC, rent vs. buy, distributions, tax obligations, and excess cash investment decisions.

For best results, these forecasts should be made available and reviewed by the executive management team on a regular basis. It is also wise to look back at the accuracy of the forecasts compared to actual so lessons can be learned and applied to future projections.  

best practices for managing cash flow year round

Moss Adams
Aaron Faulk
Partner, National Practice Leader, Construction

Managing cash flow effectively is critical to the success of any contractor. Top performing contractors actively focus on cash management and monitor performance regularly. The single most important cash management strategy is the use of financial forecasting, which includes cash and borrowing projections to ensure sufficient liquidity for the business. 

Our suggestions for best practices include using projections that include a rolling forecast a minimum of 18 months out. Contractors should also monitor their cash position in each significant contract and establish and measure goals related to accounts receivable, change orders, and collection of retention after project completion. 

Contractors should actively manage cash balances by investing these funds to generate returns while maintaining liquidity. Monitor the health of the financial institutions and use depositor insurance programs.

Borrowing effectively by using lines of credit only for operations, and longer term debt for long-lived assets, such as equipment, can help with cash flow. It’s best to match an asset’s productive life to its debt repayment terms. 

Select clients and projects with cash flow in mind. Contractors should consider clients with strong financial positions who have well-designed project plans and a solid reputation. 

Organizations should plan for taxes and understand and plan for distributions.

What are the benefits of outsourcing accounting functions to a CPA firm?

Eide Bailly LLP
Wade Sandy
Partner in Charge of Construction & Real Estate

Outsourcing your accounting function to a CPA firm can benefit your construction business by improving the quality and timeliness of information you use to make decisions critical to your business. A CPA with construction expertise can provide valuable insight into your information, and provide you with recommendations to improve and automate processes, enabling your project managers to more effectively run projects and increase their capacity. 

What are the benefits of outsourcing accounting functions to a CPA firm?

Brian Bohman

Financial management is more important than ever but forming and maintaining your own in-house team can be complicated, expensive and, at times, inefficient. To succeed, your business needs an innovative yet practical team — one that can take care of today’s tasks while using the latest technology to deliver new visibility into your business and help you make proactive, strategic decisions. With the baby boomer retirement phase happening coupled with the labor shortages that continue to persist, contractors are turning to CPA firms to outsource accounting functions. Whether you are a small or large contractor, there are many benefits to outsourcing accounting functions to a CPA firm.

First, it’s the stability and peace of mind that comes with working with a CPA firm along with the reduction of administrative tasks including the automation and utilization of advanced technology solutions. This allows the contractor to focus on the core operations knowing you will receive accurate and timely financial information. Outsourcing to a CPA firm provides industry specific expertise and mitigation of risks, such as payroll tax compliance. Outsourcing your CFO or controller is gaining popularity as this provides proactive, strategic decision making to allow your organization to grow.

CPA firms are evolving and using their industry specific knowledge to develop services to meet the accounting needs of contractors. Outsourcing accounting functions is a cost-effective, value-driven, and a risk management option for contractors who are struggling to find and hire full-time accounting personnel whether that be in the form of general accountants or CFO’s. 

What are the benefits of outsourcing accounting functions to a CPA firm?

UHY Advisors
John J. Gallo
Managing Director

There are distinct benefits to outsourcing the accounting function for a business. You shed the stress of hiring, managing and paying for internal accounting staff specially when your business is ready to scale. You create governance and oversight as outsourced accounting can provide objective insights into your financial data. You can focus on your business operations and allow the outsourced accounting function to provide you with timely, efficient and accurate information. They can also advise you on streamlining processes and automation. All of which frees up your time to focus on business growth and profitability. 

What are the benefits of outsourcing accounting functions to a CPA firm?

WithumSmith+Brown, PC
Louis Sandor III
CPA, CCIFP®, Partner

Running a successful construction company is a challenge even when you have a well-trained and qualified management team. For those companies that are not fortunate enough to have properly trained accounting personnel, looming financial landmines may not reveal themselves until after the damage has been done. Reliable, timely and relevant financial information is crucial to knowing if what you are doing is working.

Here are several benefits of outsourcing accounting and finance functions to a CPA firm so you can focus on the bigger picture – running a competitive company.

1. Accurate Information on a Timely Basis: A CPA firm will ensure your vendors are paid, journal entries are made and your financial statements and management reports are accurate, on-time and meaningful.

2. Elimination of Recruiting, Training and Managing Accounting Staff: Whether you’re looking for automated bill pay, process automation, staff assistance for accurate, up-to-date month-end reports, or even AR/AP Clerk to CFO services, a CPA firm can fill those gaps and strengthen your internal accounting and finance teams.

3. Digital Transformation of Your Accounting and Finance Workflows: A CPA firm can reduce overhead and create best practice workflows with automation tools saving you time and improving operational efficiency, allowing you to scale quickly as your business grows.

By leveraging the expertise of a CPA firm, construction companies can streamline their financial processes, reduce costs, and ultimately gain more freedom. Many construction organizations are transitioning to outsourced accounting and finance solutions to maximize time and profits.  

How might a recession affect the competitive landscape of the construction industry, and what strategies can construction firms employ to maintain their market position?

CLA (CliftonLarsonAllen LLP)
Julian Xavier
Managing Principal of Industry

Financial experts are divided about the likelihood of a recession during the coming months, as interest rates continue to increase to combat high inflation. No matter the outcome, contractors that properly position themselves will have the best chance of survival in a recessionary environment. The following are a few key ideas/thoughts that contractors should consider.

Stay with the work that you know and can execute. It is tempting to try and diversify into new markets and diverse types of work to keep busy, but this has significant risks. Keep your talent focused on what they are good at and can execute efficiently and profitably.

Pay close attention to accuracy and timeliness of financial reporting. This includes staying current with work in process reporting and financial statements. Having accurate and timely financial information will help make sure project issues are identified early and corrective actions can be taken. Also, timely financial statements can help ensure that appropriate actions can be taken to correct downward financial trends.

Conserve cash and strengthen financial relationships, look to increase line of credit availability. Cash is always critical to a contractor and even more so during a downturn. Additional focus should be made on billing practices, collection of accounts receivable and reducing the payment for unnecessary expenses.

Be strategic in shedding workers to reduce overhead, once you let labor go it will be difficult to rehire when the economy improves, hold onto your talent! Additionally, consider maintaining a growth mindset and look to hire talent that other contractors may have let go.

If possible and it fits with your expertise, look for opportunities with civil work. With federal funds for infrastructure projects expected to increase this should provide sustained work even during recession. 

What are the key considerations for succession planning?

Ceschini CPAs
Michael Ceschini
Managing Member

Many construction firm owners are considering their next chapter in life beyond their current business. Because running a business takes an enormous amount of time, energy and dedication, it is easy to delay planning an exit. Depending on the circumstances and the owner’s goals, ownership is generally transferred by selling, gifting or a combination of the two.

A succession or exit plan is a strategic plan for the owners, their families and their businesses. Whether or not you plan to retire, at some point the ownership will be transferred to someone else.

There are many areas to consider when developing a succession plan and the following are just some points to consider:

Identify Exit Objectives–When do the owners plan to exit? How much cash will they need? To whom will they transfer the business (family, co-owners, key employee(s), outside party)?

Develop a team of trusted professional advisors.

Document each aspect of the transition sequence.

Quantify Business and Financial Resources–Provide a baseline value, measure business and personal resources, monitor progress towards stated objectives.

Maximize and Protect Business Value–Grow business value, motivate and keep key employees, focus on increasing cash flow, build and nurture a solid management team, implement strategies to grow the company, reduce income taxes, solidify and diversify customer base.

Employ a Comprehensive “Successor” Selection Process–Consider all possible successor candidates whether it be family members, key employees or third parties.

Succession planning doesn’t need to be an overwhelming chore. Your trusted advisors should be able to easily guide you through every step to ensure a smooth transition. 

How might a recession affect the competitive landscape of the construction industry, and what strategies can construction firms employ to maintain their market position?

Baker Tilly
Laura Cataldo
Director, Construction Advisory Services

The experts are not aligned in agreement on how likely a recession is, but some level of economic disruption is a prediction that all can agree on. Thriving during periods of economic disruption requires that construction companies be agile with strategies to mitigate risk in critical areas to the business such as finance and workforce.

Disruption in the financial markets is evident in the bank failures, rising interest rates, and the inability of project owners to secure adequate funding to proceed. Workforce, an ongoing challenge for the construction industry for many years, is being challenged in new ways through labor goals and compliance requirements.

Projects impacted by tight lending and high interest rates might be become feasible through the Inflation Reduction Act Investment or Production Tax Credits (or direct pay for non-taxable entities). Contractors can ‘reverse Value Engineer’ and propose adding a geothermal system or solar panels that will initially increase the project cost but lower the end cost through Investment Tax Credits of 30-50% (if prevailing wage and apprenticeship requirements are met).

Contractors need to be focused on deliberate efforts to recruit and retain a workforce that allows them to meet social responsibility goals pushed down to business partners (contractors) in the private sector and increasing public sector workforce participation requirements (such as diversity and apprenticeship). Adapting company policies to meet the needs of employees, particularly through flexibility, training and development will help with recruitment and retention and position your company for success.

At Baker Tilly, we believe that opportunities can emerge from this disruption. In order to slow the impact of these disruptors and emerge stronger, contractors need to be agile and adapt to the changing conditions. 

Why is it important to choose accounting software tailored to the construction industry?

Foundation Software
Mike Ode

The construction industry involves complex accounting—contractors are managing multiple projects at once, which means there are multiple sets of costs to track. Having specific construction software that can both understand and handle your accounting needs can be vital to your business.

Construction-specific accounting software helps manage costs like labor, materials, equipment and overhead. You can also centralize the reporting of all project expenses. And, with consolidating those reports within the software, the numbers will constantly be updated—giving you a better handle on projects status.

With robust software, you can calculate job costs automatically and tie expenses directly to your G/L. This allows you to see the health of your company through both a job cost and a full financial standpoint. Overall, you can easily keep accurate tabs on company spending, monitor cash flow at company and job level, surveil project details and receive alerts for outstanding AR and AP payments.

Industry-leading accounting software should be accessible, efficient, straightforward and easy to navigate. It must have the ability to grow with the company, handle multiple jobs at once and automatically generate job cost reports.

Whether you’re striving for growth or looking to eliminate needless spending, construction accounting software can provide a consistent and reliable framework for managing your company’s finances. 

Why is it important to choose accounting software tailored to the construction industry?

Premier Construction Software
Karoline Lapko

With industry-specific software, construction companies can effectively scale their operations, achieve operational excellence and gain financial control of their business and projects.

It provides a unified platform for financials, accounting, job costing and project management, allowing businesses to leverage cost control features, automate key workflows, manages variances, forecast accurately, track cashflow and make more informed decisions faster. This unified approach eliminates the need for multiple software systems and ensures seamless data flow, real-time visibility across various departments, and stronger collaboration among all project stakeholders.

What should contractors consider when choosing a new accounting firm?

Phillip Ross

In the construction industry, one of the most important relationships for any company is its CPA, especially since the industry’s unique accounting and tax rules, treatments and issues require specialized expertise. Contractors should consider several key factors when choosing a new accounting firm, including the firm’s industry experience and understanding of your business issues to meet specific challenges and provide solutions. A well-respected accounting firm’s name on financial statements will carry weight in the financial community. A proactive accounting firm with experience collaborating with sureties, insurance brokers, and banks can be a trusted business advisor, not just an accountant. A team of highly-qualified individuals in audit, tax planning and advisory services are crucial for success. The accounting firm should be knowledgeable about contractor-specific tax laws to help navigate complex compliance requirements. Contractors benefit from working with a firm with a diversified range of services that can identify potential significant tax savings opportunities and maximize cash flow.

Contractors should assess a firm’s capabilities, responsiveness and accessibility, and ensure that the advisor will surface new ideas and issues. it is vital to consider compatibility and cultural fit with the accounting firm, along with the long-term relationship potential, and if the accounting firm can grow and adapt alongside the contractor's business. With the recent accounting industry mergers, you’ll want an independent firm that will be around for a long time to work together.

In summary, contractors must evaluate many factors in order to find a key advisor that contributes to their financial success. 

What should contractors consider when choosing a new accounting firm?

Grassi Advisors & Accountants
Carl Oliveri
Partner, Construction Practice Leader

The most important attributes to look for are experience in your sector of the construction industry and expertise in its specific regulations, accounting strategies and tax-savings opportunities. If your accountant is not proactively identifying industry-specific accounting methods, tax deferral opportunities, tax credits, and audit readiness recommendations, you are almost certainly losing money and putting your organization at risk.

It is also essential that you choose a CPA firm that can provide much more than well-executed financial statements and tax returns. As one of your closest advisors, your CPA should be a go-to resource for guidance on every business decision you make. At Grassi, we like to arm our construction clients with benchmarking data, cash flow projections, technology recommendations, bonding advice, prequalification assistance, enhanced operational efficiencies and internal controls to help make their businesses stronger.

Ideally, look for a firm that can provide multi-disciplinary services. Here at Grassi, we have a comprehensive range of HR Consulting, Technology Consulting, M&A Advisory, ESG and other experts outside the traditional audit and tax fields who we can pull in as needed to provide seamless continuity of client service.

While audit and tax deliverables are clearly important, it is the relationship with your accountant that will bring the most value to your firm and its future. Ask a lot of questions and choose someone who instills confidence in you through their answers. This collaborative relationship – or lack thereof – can make or break the profitability and sustainability of your construction firm. 

What should contractors consider when choosing a new accounting firm?

Robert G. Nagle, CPA

When evaluating a new accounting firm, each contractor is best served by first evaluating what they require and aligning that with the candidate firm’s approach to service. This is as important for the accounting firm as it is for the contractor. For instance, is the contractor’s primary requirement finding the lowest cost service to fulfill only basic compliance needs for financial statements and tax returns? Or does the contractor seek business and personal financial success for the long term, in which case he or she would require comprehensive services?

Fully understanding a contractor’s requirements is critical for any candidate firm to assess whether a client relationship would be right for them. Some firms prefer to focus on the compliance needs; they design their service delivery to turn it out at the lowest cost with minimum attention. Firms that use an integrated model typically decline those relationships, reserving resources to work only with contractors committed to long term, integrated success. These firms generally understand that long-term personal planning integrates with business financial success and, as such, they tailor service plans that foster long-term success. So what does a firm with an integrated model look like?

In general, that firm offers expertise in multiple areas a business owner might call upon throughout different stages of their business and their own lifetime. Expertise in the areas of assurance, tax compliance, tax planning, long-term retirement planning, long-term transition (not limited to succession of ownership) planning, fractional CFO services, wealth accumulation planning, annual personal financial planning reviews could all be considered in a service plan. A contractor must self-assess what is important to them, and then assess candidate firms that are aligned with their needs.

How can technology help contractors make better business decisions?

Joel Hoffman
Director, Product Management (Construction, Field Service, Property Management)

Today’s construction business environment demands that organizations navigate projects with an elevated level of complexity. Construction software needs to be utilized for the entire project lifecycle, Financial Management, Project Management, Field Communications, and more. Technology supports this cooperation.

Contractors need access to accurate and timely project data to make strategic decisions. Viewing critical reports and information while on the go, using phones or tablets. Real-time updates provide a single source of truth for the project – no more working from outdated instructions or struggling to fill in an entire spreadsheet data immediately before a meeting.

Technology can help capture the time required for accounting in real-time. Use mobile devices to capture and send expense receipts and attach photos from the field to jobs and activities.

The biggest problem with incomplete data is that it stymies the feedback loop that can help leaders improve their businesses and their industry. By building a true and complete picture of the work as it happens, companies may actively get better at what they do, and improve their profit margins in the process.

Construction data is only helpful with tools to access and measure it correctly. Use analytics and business intelligence to hone in on KPIs for a clear picture of past and current performance for informed future decisions. Analytics should provide concise budget information, such as hard and soft costs, change orders, overhead costs, and fees to proactively measure profit. This is how forward-thinking business leaders make sound decisions and agile actions for new challenges. 

How can technology help contractors make better business decisions?

Explorer Software
John Rosch
North American Sales Manager

In today's rapidly evolving business landscape, technology has become an invaluable tool for contractors seeking to improve their decision-making processes. From streamlining operations to enhancing communication and data analysis, technological advancements offer contractors numerous opportunities to optimize their businesses.

One of the key aspects of successful contracting is efficient project management. Technology provides contractors with advanced project management software and tools, allowing them to plan and track projects with greater precision. These platforms facilitate scheduling, resource allocation, and real-time monitoring, ensuring projects stay on track, minimizing delays, and improving overall productivity through customized dashboards.

Technology enables contractors to collect and analyze vast amounts of data, leading to data-driven decision making. With digital tools and analytics platforms, contractors can monitor key performance indicators, identify patterns, and gain valuable insights into their operations. These data-driven insights help contractors identify areas for improvement, optimize resource allocation, and make informed decisions that maximize profitability and minimize risks.

The rapid advancements in technology have revolutionized the way contractors operate and make decisions. From project management and data analysis to collaboration and automation, technology empowers contractors to make better business decisions. By leveraging these technological tools, contractors can streamline operations, enhance communication, and leverage data insights. Embracing technology is no longer an option but a necessity for contractors seeking a competitive edge in the digital era. 

How can technology help prevent project cost overruns?

Mike Milligan
Chief Growth Officer

Project cost overruns are one of the most common challenges that General Contractors, Owners, and other stakeholders face in the construction industry. Whether it results from change orders, project delays, schedule changes, or any other number of factors, it continually plagues construction projects on a consistent basis. Believe it or not, technology, and perhaps more specifically, construction financial software, can help to mitigate this problem and in some cases, actually eliminate it. Overbilling is extremely common in subcontractor invoicing, or payment applications as we more commonly refer to it.

That's where software solutions can really manage and control this specific area of construction billing. Software that works with your construction accounting system and seamlessly integrates financial data from subcontractor payment applications into the general ledger for that specific project not only provides visibility and transparency to all parties, but prevents overbilling from taking place.

This software will make it impossible for any overbilling because it creates schedules of values broken out in a larger contract between the GC and the subcontractor. Then it only allows the amount of the value to be billed, as per that value and the invoicing schedule therein. It will also pull change order details from the accounting system so that those approved changes in costs will be reflected in that subcontractor's scope of work agreement and therefore provides the transparency as project costs routinely are modified over the course of the build.

Acquiring this kind of software solution is an investment but the benefits provide 3X - 5X the return on that investment. And provide the peace of mind to proactively and effectively managing costs from one construction project to the next. 

What can contractors do to ensure overhead costs are correctly allocated to individual projects to ensure profitability reports are more accurate?

Anthony (Tony) Hakes
Lead Managing Director | National Construction Practice Leader

To ensure profitability reports accurately reflect project expenses, contractors must allocate overhead costs to individual projects. For proper allocation, overhead costs must be pooled into similar buckets of costs with similar cost drivers. Next, the most appropriate cost driver must be selected to allocate those overhead costs to the project. The most effective cost driver is one that is most closely related to both the cost pool and the projects, especially if it is directly related to the incurrence of the overhead costs.

Let’s take equipment costs, for example. Those pooled costs should include expenses such as depreciation, interest, fuel, oil, grease, maintenance, etc. A common method for allocating equipment costs is multiplying the hours of equipment operation by the cost per hour. This cost per hour equals the total lifetime ownership and operating costs divided by the expected lifetime hours of operation.

More accurate allocation of overhead costs is needed to avoid distorted project profitability assessments, which can create compliance issues with GAAP and IRS guidelines. Therefore, careful attention to overhead cost allocation is crucial for maintaining accurate profitability reports and meeting accounting standards.


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