By Bengaly Kante
It’s the business risk that could hold back the long-term profitability of many construction trade businesses in Pahrump. While contracting firms are busy with current projects and securing new customers, cash flow is leaking from the business, and it can cause timing and margin issues without owners even knowing it. Here are three signs for business owners to look out for.
Receivables Profit Leakage – Contractors in the construction trades are often so busy running their business that it ends up that nobody is focused on collecting the customer payment receivables. Additionally, work that was completed may never have been billed at all. That doesn’t even address all the change orders, extra hours and rush work requests from customers. Regular and consistent cash flow requires dedicated focus on collecting customer receivables.
Payment Timing Profit Leakage – Customer 30-day net payment terms suddenly become 60- and 90-day net payments. Customer payments take longer to collect while the business owner needs to make weekly payroll. Unfortunately, due to this timing mismatch, the owner takes out a line of credit instead to plug the cash flow drain hole.
Pricing Inflation Profit Leakage – Long term contracts mean a period of guaranteed work for construction trade businesses. While a two-year, or more, contract might be welcomed for steady cash flow, they can be a source of significant margin leakage. Especially, if the budget for equipment, materials and labor is locked in at the start of the project. Construction trade businesses have seen significant project cost inflation over the past few years. If this is not addressed in the contract, this can be a silent margin leakage for the business.
How can construction trade businesses in Pahrump find these hidden cash flow timing leakages in their business? The solution is running a diagnostic. Just like taking a car to a mechanic, a diagnostic can point an expert in the right direction to solve and resolve the issue.
During my 15 years in business and commercial banking, I worked directly with business owners and regularly reviewed financial statements, cash flow, and credit requests as part of evaluating their financial needs. I came across many examples of cash-flow timing and margin issues. One example was a multi-million-dollar Nevada HVAC business that had been operating for decades and was seeking a line of credit from a large bank.
The owner had a cash flow timing problem but did not know the solution and instead wanted to treat the symptoms. They were profitable on paper but did not have the cash to purchase equipment and service new contracts. The band-aid solution was to use a line of credit to relieve the immediate cash pressure without first diagnosing what was causing it.
Borrowing itself wasn’t the problem. A line of credit can be an appropriate tool for working capital, just as financing equipment that adds capacity can make good business sense. But borrowing to cover an undiagnosed cash-flow leak doesn’t fix the underlying issue. Diagnose the leak first, then determine whether financing is part of the solution.
The diagnostic indicated that the business indeed had a mix of delayed billing and cash-timing gaps. But the line of credit threatened to only make the situation worse. With strategic forecasting of revenue and expenses, the owner was able to locate the leakage, plug the hole and adjust the cash flow timing and profitability of the company.
Pahrump construction trade businesses are built to function in the present, driving revenue, making payroll and building fantastic buildings and projects that drive economic development in our state. They are not always being run for what will happen in the future.
Historical financial reporting remains essential, but construction owners also need forward-looking cash forecasts, job-margin tracking, and operating decisions built around what is likely to happen next. To avoid cash flow timing leakage and continue to build strong construction trade businesses in Pahrump for the future, they must start thinking and focusing more on the future warning signs.
Bengaly Kante is Founder and Principal Advisor at Praxis Profit, a Nevada-based boutique CFO advisory firm helping established businesses improve cash-flow visibility, protect margins, and make stronger financial decisions. For more information, visit praxisprofit.com.
