Dear Jayme,
I never know if my checks are going to clear or not. I have three crews, and we're always busy, so it seems like this shouldn't be a problem, but I'm always getting unpleasant surprises. I thought my cash problems would be gone once we got bigger and busier, but they're not. How can I get a handle on this?
Dylan
Dear Dylan:
It's no fun wondering if the payroll checks will bounce. Fortunately, the mechanics of cash management aren't rocket science (it's barely basic arithmetic) and all it usually takes is some attention and diligence to tame this beast.
Cash shortages can be as simple as bad timing (no big deal and simple to fix) or can be caused by a serious flaw in your business model (a very big deal that requires immediate action). Either way, we address it like this:
Understand the concepts: You don't need to learn high finance, but you do need a clear understanding of basic cash flow concepts and rules of thumb. Your accountant or bookkeeper should be able to walk you through this in understandable terms.
Got data? Your accounting systems must be updated at least weekly and accurate, or you're flying blind. If you don't have complete confidence in your financial data, get it fixed and keep it fixed.
Build a simple cash flow projection model: Stay with me, this is easy. It should look something like this:
| May | June | July | Aug | Sept | Oct | |
| Actual | Actual | Actual | Projected | Projected | Projected | |
| Beginning Cash | 9,500 | 7,557 | (21) | 4,849 | 11,149 | 7,449 |
| Plus: Revenue | 82,568 | 91,222 | 150,698 | 165,000 | 130,000 | 100,000 |
| Less: Expenses | ||||||
| Materials | 41,284 | 45,611 | 75,349 | 82,500 | 65,000 | 50,000 |
| Labor | 33,027 | 36,489 | 60,279 | 66,000 | 52,000 | 40,000 |
| Owner Salary | 9,000 | 9,000 | 9,000 | 9,000 | 9,000 | 9,000 |
| Rent | 1,200 | 1,200 | 1,200 | 1,200 | 1,200 | 1,200 |
| Tax | 6,500 | |||||
| Total Expenses | 84,511 | 98,800 | 145,828 | 158,700 | 133,700 | 100,200 |
| Monthly Cash Change | (1,943) | (7,578) | 4,870 | 6,300 | (3,700) | (200) |
| Ending Cash | 7,557 | (21) | 4,849 | 11,149 | 7,449 | 7,249 |
Plug your actuals into the first three months, then, based on the actual trends and what you know about what's coming up, make your educated guesses about future sales and expenses and fill them in. No, you won't get it exactly right and that's okay. You'll get better with time.
Important: When projecting cash flow, "revenue" means cash in the bank, not bookings or billings. "Expenses" mean when you actually write the checks.
Get up-close and personal: This little spreadsheet will teach you volumes about your business. What's your breakeven revenue? Your sales/expense/cash trends? What's causing them? How does seasonality affect things? Are cash shortages caused by simple bad timing, fast growth, inadequate margins or high fixed expenses?
Don't make a move without checking your cash flow projections: This is where you test the impact of new projects, hiring and investments.
Cash flow management isn't rocket science and you already know the basic concepts. In a business, however, there are just too many variables to keep track of in your head, so use a simple spreadsheet (or your accounting software may have a cash flow report and projection feature) to keep it straight.
None of this will guarantee you'll never have a cash shortage, but it will guarantee no surprises.
Cheers!
Jayme Dill Broudy
Jayme Dill Broudy is founder and principal of Contractor's Business School, a hands-on training program for contractors. Her "10 Key Strategies" program helps contractors work less, have peace of mind, a more balanced life and a renewed passion for their businesses. Visit www.contractorsbusinessschool.com or call 800.527.7545 to get a free CD, "10 Key Strategies to Building a Business That Works."
Construction Business Owner, October 2006
