Contractor Cash Flow: How to Stop the Feast or Famine Cycle

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ℹ ABOUT THIS EPISODE

Are your cash flow woes hitting you like a hammer to the thumb? Let’s talk about it. 

This week, Wade and Stephen dive into the challenges contractors face with cash flow and share practical solutions to solve those issues…for good. They discuss indicators of cash flow problems, like difficulty paying bills and 'payroll panic,' while offering methods to break the cycle using the Profit First system. 

Tune in to learn strategies for managing your finances and achieving long-term success in construction.

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⌚️ In this episode:

• 00:30 Identifying Cash Flow Problems
• 01:24 Common Cash Flow Challenges
• 02:59 Understanding Construction Cash Flow
• 05:35 Practical Solutions for Cash Flow Management
• 08:04 Implementing the Profit First System
• 16:12 Setting Up Financial Accounts

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

Wade Carpenter: [00:00:00] Ever finish pricing out a big job, only to wonder if you'll have enough cash to actually complete it? Cash flow problems hit contractors like a hammer to the thumb: painful and impossible to ignore. In today's episode, we're tackling why contractors struggle with cash flow and how to fix it for good.

We're talking practical solutions to stop that feast or famine money cycle. This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter & Company CPAs alongside Stephen Brown with McDaniel Whitley Bonding and Insurance. Stephen, what's the first sign you notice that tells a contractor they may be having some trouble with cash flow?

Stephen Brown: Well, they're not paying their bills. Your vendors count on you and they're your lifeblood. And when you're not paying your bills or not communicating certain issues, that's a huge red flag. And your comment about the pain of hitting your thumb, that's so true. I think what I want our listeners to know, Wade, from this podcast is [00:01:00] just take a deep breath, listen to the podcast, and there's things you can do immediately. There's triage. This is not a podcast all about just, oh, well this is what you should have had in place, and if you had have, this wouldn't have happened.

Well, that's true. But we also wanna help our listeners who are going through this because like you said, Wade, it just feels like a nightmare, doesn't it?

Wade Carpenter: Yeah, and there's different forms it may take. I'm sure you experienced it, but payroll panic every week to cover payroll by Friday. Is it a weekly scramble to cover payroll? That may be one sign that maybe you're having a cashflow problem. I always say it like you're borrowing for the next job till the pay for the last job. That's a common complaint I hear.

Stephen Brown: Yeah, we used the phrase robbing Peter to pay Paul.

Wade Carpenter: Right. There's several other ways you could say it. Are you losing sleep over your finances? If you got like a hundred thousand dollars in receivable and you can't pay your light bill, something might be a problem. I guess you could say, [00:02:00] if you can't pay your light bill, you might be a contractor.

I don't know.

Stephen Brown: Yeah.

Wade Carpenter: Here's your--

Stephen Brown: Oh, that's a good point. It really is. And as you're in that point where you can't pay your light bill and you can't make payroll and you're looking for a bag to breathe into, to just keep from hyperventilating, just, take a deep breath right now. Breathe in, let it out. 

There's always something you can do. There's always something you can do. And then Wade, we have another paradox, is you're sitting on too much cash, and then you're gonna have another cash flow crisis coming up. Well, this podcast really speaks to that as well, doesn't it?

Wade Carpenter: Yeah, and there's a lot of things you can do to start making things better. But if you're still constantly telling yourself you're not broke, your money's just taking the scenic route to get to you, well, that's a sign that you need to be doing some of this stuff a little differently. 

A lot of our contractors understand where we're coming from, but you know, you gotta do some things differently, I guess is the point of today.

[00:03:00] What I wanted to sort of talk about today was like, construction cash flow is, if you're laying block on quicksand, you're not gonna fix your foundation. You don't fix your cashflow with a shaky foundation. The whole structure might come down. We could talk about why some of these things happen and then how to fix it. But have you got any thoughts about the different things that go into construction cash flow that end up causing all this grief for contractors?

Stephen Brown: Well, the time to get paid, there's just, there's long cycles on certain projects. And then also in the flow of the type of work that you do. You got weather delays and then you gotta upload upfront all your material costs on the job as well. Some of the things that are, are hitting your cash flow are just normal.

You say, okay, well I, I know that I'm a, I'm a contractor. This is what I do. I know that I'm gonna face that. But there's [00:04:00] a lot of other things going on behind the scenes that you have to be aware of too, that could be just constricting that cash flow. 

Wade Carpenter: I think we should probably unpack a couple of those things.

Stephen Brown: Okay.

Wade Carpenter: You were talking about restricting cashflow. You think about your cash flow like your garden hose. You got a knot in your garden hose, you got multiple knots in your garden hose.

Your cash flow is technically in your hose, but it's not getting to the plant to get it where you need it to be. It's not flowing freely. So you know, these kinks in the hose, just like the kinks in your cash flow, you're not feeding your business properly because of things that just keep popping up and, and these kinks just, it's just frustrating.

Stephen Brown: I wanted to make sure that as we did the podcast today on cash flow that there's so much like you said, to unpack into what's affecting the cash flow, what's tying those knots up in the hose to keep you from, from watering your garden. [00:05:00] So I also really wanted to speak to someone who is absolutely immediately too stressed about their cash flow situation to really give a lot of, of thought. 

You know that expression, it's hard to see the forest from the trees? You're stuck in this situation. It's hard to see what knot is really hurting you. What overhead is doing to you. And then what your payroll is doing to you.

Those are the things, the tax problems you might have. My advice, always is just start with something. Where do you start, Wade?

Wade Carpenter: I wanna stick to a couple of these things that you were talking about before, like these long payment cycles. You feel like you're constantly being the bank for your customer. And it just like, you pay your guys, you pay for your materials and then you send the bill, and then you wait 30 days or more. Then they drag you out on getting that. They delay it or say, hey, my, my bank [00:06:00] didn't approve this payment, or whatever. Or just hold back.

Or just things like retainage that you don't have in other industries just are constant pressure on a contractor's cash flow. You know, we have things like seasonality in construction that don't hit other businesses. It ebbs and flows and it's just never seems to be this, that's why I use that kink in the garden hose analogy. It's like, It seems like things are going along all fine and then you hit one of these little things. And it just sort of throws everything out. And that's what we're talking about today, how can we get outta that kind of cycle? 

Stephen Brown: I think it's really important that we also get into the overhead, and how it's always more than you think, and it's always growing in ways that, that you can't really grasp.

Wade Carpenter: Yeah. And know, I guess there's a lot of things that, the traditional solutions, like how do we fix it? [00:07:00] And like I said, I say in my book, everybody thinks you need a bigger boat just from the movie Jaws. Everybody thinks more revenue fixes all the problem. And that's almost like saying your diet problem is gonna go away if you just buy some more groceries. It doesn't really work that way. 

And we're gonna do another episode on this particular problem, but you know, as you grow, you do have additional overhead. I constantly see problems with contractors not really knowing what factor of overhead to put on there.

The traditional solutions, if you're got everything in one bucket one bank account, I would say, then, you're basically driving blind. You and I know, I came from the audit background and the tax background and the CPA and I always said, hey, you're supposed to have great books and great job costing and that will cure all your problems. And I absolutely agree that you need all that stuff. I couldn't get stuff to Stephen if we didn't do it. [00:08:00] But those are not the same thing as problems with cash flow.

Stephen Brown: Right.

 I really do think, Wade, that the Profit First concept of breaking that job down into different units and, and just literally apply the funds to the different buckets, so to speak, is always the answer. You know, those numbers absolutely tie into your expense and it's there when the money comes in, it is there to pay that expense.

And then Profit First says, you literally are paying yourself, and you've got a profit bucket. It sounds so simple, and it, it, it may take a little work to implement, but it's so powerful, Wade. It stops this cash flow nightmare from occurring. It allows you, talking about seeing the forest for the trees.

You've got each bucket pointing you in the right direction on a job. And you can say, well, y'all don't understand how many buckets that I [00:09:00] have. Wade, you really do. Yeah, you do. You're a construction accountant. You do know. And it's, it's a partnership, isn't it, for getting these set up?

Wade Carpenter: It is, absolutely. But you know, the accounting rules and you know what, so what would go into job cost--

Stephen Brown: Mm-hmm.

Wade Carpenter: is not the same thing that I would put-- in my book, I call it job expenses or JobEx.

Stephen Brown: JobEx.

Wade Carpenter: That's not necessarily cash out on your job. So if you've got like depreciation on your excavator, that doesn't go out in cash.

But what does go out in cash is your note payment on those excavators and those kind of things. But you know, I guess sticking with what's causing these things, and I was actually discussing this with a contractor yesterday. After Covid, the disaster loans, they were a godsend to businesses. Because there's a lot of contractors that would've gone out of business without 'em. 

The problem was people use these [00:10:00] as a crutch or, you know, it's like, okay, money's here. So, whether you got these EIDL loans, which were like once in a lifetime things where you get 30 year mortgage with 3.75, you're never gonna find that again. But again, if you're relying on getting a line of credit or whatever, those are definitely helpful as you grow. But that's helpful until you start treating 'em like it's income and start spending money faster than realizing that you're just digging a deeper hole.

Stephen Brown: Mm-hmm.

Wade Carpenter: What I was saying before, I still believe you need financial statements. Absolutely. You need great job costing. But that really is looking in the rear view mirror. It doesn't help you drive that truck forward. Yeah, you need that history to see and predict where you're going, but what you're leaning on is your cash flow. 

So if that makes some sense, maybe we can start talking about the Profit First solution that I'm proposing in my book, and you know, maybe you've heard of. Any [00:11:00] thought on that before we jump into that part?

Stephen Brown: No, let's jump into it because it's, it's everything to understanding how your cashflow problem occurred. Because until you can figure out how these problems are occurring, you can't provide a solution for 'em. And that's the frustrating part to a lot of contractors. 

My phone's lit up. Everybody has got a problem. Everybody wants to be paid. I don't have money coming in. That's the time that you really have to hit that pause button and just say, pause. This is the most important thing I'm dealing with. Everything else can wait. And it's hard. I can say that to you, but until you're in a situation to do something about it, you probably won't listen to either one of us, Wade.

Wade Carpenter: That's sad. True. But.

Stephen Brown: Hmm.

Wade Carpenter: To boil it down, what the Profit First system is and does is basically gives every dollar a job to do. Let's [00:12:00] just say like you're the general contractor for your own cash. And all these people you pay, we need to put 'em in buckets, just like on your job. They have a specific job to do. Everybody with their hand out, there's nothing gonna be left over if you just let it out the door. And that's part of the problem. 

So let's talk about some of the core principles. The first principle I would say is that you've got to accumulate your money in one place, and keep that separate from where you spend it. I know that sounds silly and stupid, but if somebody is just always out there-- like in the book, I use the analogy, a salad bar. Like You put the food out, and then the good stuff gets taken up. 

The money goes out fast as it comes in. That's just what happens when you don't have control over it. So you need to accumulate it in one place, then we need to start putting it out on the salad bar.

Stephen Brown: I would [00:13:00] prefer all, you could eat seafood buffet for the salad bar, but.

Wade Carpenter: Okay.

Stephen Brown: I, I'm sorry, go ahead.

Wade Carpenter: It's okay. And then, like I said, you gotta allocate it to different accounts based on their purpose.

Stephen Brown: Right, sure.

Wade Carpenter: core. If you don't put some aside for you for your profit, it's not gonna be there because there's always somebody with their hand out. And you're always going to find a reason, Hey, I'm just reinvesting this money in my business, or whatever. But when tax time comes, the money for your taxes are not there. So--

Stephen Brown: Mm-hmm.

Wade Carpenter: Again, after we accumulate it in one place, we're gonna allocate it into different buckets for specific purposes.

Stephen Brown: Yeah.

Wade Carpenter: And the next concept of this is we need to have some order to the money movement and how we let it come in and go out.

Because if you have subcontractors show up at your door every week looking for a [00:14:00] check, waiting in your lobby to pick up a handwritten check, or you have to drive an hour or some to take a check and back or stuff like that, you're at the mercy of this, just, chaos. Like people are just coming all over the place.

Stephen Brown: Yeah.

Wade Carpenter: The purpose of what I'm saying is you've gotta create some order to your money, and a rhythm for depositing your money as well as paying it out. Does that make some sense?

Stephen Brown: Absolutely.

And if you're in this cash flow situation, you've been that person in the owner's lobby waiting for a handwritten check. You have, I've certainly had to do it over the years and psych psychologically it's, it's, it's necessary, but it just creates a a cycle that just doesn't seem to end.

If you're waiting to get paid, you have to end that relationship with that person that's not paying you just as fast as you can. It's the same as a contractor in a situation where you're not getting paid in the cash. Your contractual documents ought allow you to just shut everything [00:15:00] down. Talking about getting their attention. 

But we weren't really talking about that way. We were really talking about allocating the operating expenses, the OpEx, you call it.

Wade Carpenter: That and the, the job expenses too. That's money for other people. And if you never stick that money aside for the job expenses, and again, knowing exactly what goes into that, you're constantly gonna be borrowing from that next job to pay for the last job.

Okay.

So, you know, it seems like this vicious cycle, and you gotta break the cycle. You gotta do some things like putting it in these buckets and having some order to it. Then the last principle of that is like removing some of the temptation. Part of it is separating a different bank account. Some of it may be moving it to a different bank.

Stephen Brown: Mm-hmm.

Wade Carpenter: But every job has a purpose.

Stephen Brown: No, that's a great, that's a great statement, Wade. Every job has a purpose. It does. And every job has expenses. And every job hopefully has profit [00:16:00] built into it. And as we keep talking about this, the real thing, operating expenses, job expenses, setting up your profit in a, a separate category.

Tell our listeners a little bit about the nuts and bolts of the names of these categories and why you set 'em up that way, because I know we've done a lot of podcasts on this topic in the past, but right now we might have listeners that are in a cash flow crunch right now, that wanna just grasp your book, Profit First Construction, and getting these concepts into place.

Wade Carpenter: Yeah, again, the original book and the derivative book that's already out there for contractors, they still lead everybody to believe that there's five main accounts. But I will tell you, you need a minimum of six accounts if you're in construction.

Stephen Brown: Mm-hmm.

Wade Carpenter: And the first one is what I was talking about, like you need to accumulate in one place, that's an income account, just like a [00:17:00] staging area. Your job expenses account, we're gonna carve off a bucket from that to just cover that stuff so we--

Stephen Brown: A separate bank account.

Wade Carpenter: Separate bank account.

Stephen Brown: Mm-hmm.

Wade Carpenter: And then we know we've covered-- if you're running short in that account, you're either, you quickly learn that, hey, I haven't bid this enough. I haven't put enough money into job expenses or a job's going wrong. Or, you know, sometimes we have things like, you know, the growing business or things like that. These guardrails that we're putting up. But again, that's the job expenses.

We have, I really usually put like the Profit first. That's the name of the book. But you know, if you don't take that part out first, it's not gonna be there. So we have an account called Profit. We have an account called Owners Pay. Which--

Stephen Brown: Gotta pay your own bills.

Wade Carpenter: Well,

Stephen Brown: Gotta feed your family. Gotta feed yourself.

Wade Carpenter: Too often we, we're the mar martyr out there. We're entrepreneurs and [00:18:00] we gotta pay everybody else before we-- the old saying that leaders eat last or whatever. Well, I don't believe in-- I mean, That's a inspirational quote, but if you can't learn to pay yourself, if you can't learn to run a business that can pay yourself, if you're the lowest paid employee in that business, and if you think about all the hours you put in, you might very well be the lowest paid, and you probably need to set up your own owner's pay account and make sure it's there.

Stephen Brown: Okay.

Wade Carpenter: The next account is the Tax account. And if you come up end of the year and your, spouse has another job whether she's a teacher or whatever she does, and then you're having to borrow outta your personal savings to pay for those taxes, you need to put the tax money aside, so that it is there. So that you know the business needs to pay its own way. And if you're gonna have profit, you're gonna have taxes, whether you like it or not.

Stephen Brown: Sure.

Wade Carpenter: And the last one is the operating expenses or [00:19:00] OpEx. That's the one that keeps the lights on.

That's the one that covers your overhead. And again, if you can dial that number in, I don't have time to go into it today, but that is number you're dialing in, in cash for your overhead. That's a better factor for overhead than what I see a lot of people bid their jobs with.

Stephen Brown: Okay. Once you get all these, these accounts set up, then you apply a percentage for overhead to put in with every job cost to come in? Or is that, does that change?

Wade Carpenter: No, if you got a hundred percent comes in and then, you know, we could debate it quite a bit about what the job expenses and how that's supposed to be done. My simplified approach in my book is, okay, we've got a hundred percent to allocate.

So you know your job expenses are 70% and then you're gonna take 10% for profit, or 5% for tax or whatever those [00:20:00] numbers are. we're gonna allocate in that proportion proportion and that's what keeps our guardrails up as you grow. 

If nothing else, if you only have in your operating expense account, that keeps your overhead from growing at a faster rate than-- you know, it is very easy when you're in this growth mode. And I know we're gonna have another episode on all that. But the bottom line is every dollar gets told where to go.

Stephen Brown: Yeah.

Wade Carpenter: Just wouldn't let your labor crew run wild without some foreman. That's what you need to be is you're foreman on your own cash.

Stephen Brown: Yeah, I don't know if this is nationwide or international, but a local advertising agency years ago for, for First Tennessee Bank literally had characters, they were money and they were dressed up as the characters and they were just doing stupid stuff and it was really hilarious. But the whole point that was hitting home is managing that money.

And I think the key point that really hits home with me, Wade, is you got a hundred percent. [00:21:00] That's it. It's a hundred percent. Think about that. You got a hundred percent income deriving from a job that you've given a bid for. You got a hundred percent coming in. You have to allocate that. And I'd also go back another step and say, okay, I'm looking for a bag to breathe into.

I either didn't bid it right or I haven't allocated my resources properly. What do I need to do immediately? And I would say this first. First of all, figure out what you've done wrong. The next thing is, for example, that Covid money, that should have been going in there. No, no matter how bad your situation is, it's never too late to set up your accounts on your jobs to help you allocate what's coming in.

At any shape and time, you can't just wait till everything's perfect to implement Profit First, Wade. You're in a situation, you think, okay, well what can I sell and get some cash infusion in? Say that Covid money came in. That would've been a great time to implement Profit [00:22:00] First and shore up the funds in those buckets that are missing that you need. That's the first thing. 

Then you wouldn't have gone and, and, and blown that windfall. But you know, that's ancient history. But you have a ways of tightening your belt, bringing some cash in. Then you've got other jobs where that, that knot in the hose is cash flow on a job for a cost you've already incurred, you're not being paid for.

Well, that's the situation where you're looking for a bag to breathe into. That's where you go to the bank. If you have to. It's gonna eat into your profit. But there you go. That's why banks are there. That's why you have lines of credit. It's a fallacy. We don't wanna have to use them ever.

Right now you're looking for a bag to breathe into, and you're in a nightmare situation. You're like, Hey, Wade, Wade, Stephen, this Profit First thing, it sounds good, okay. I like the concept of it. It, it certainly makes sense, [00:23:00] but I ain't got time for that. I got too many things going on.

What would you say to them?

Wade Carpenter: Well, you already said it very well. It's no better time than the present. And too often you're in this chaos. And you're never going to get out of this chaos if you don't stop and say, we gotta do some things differently. 

Just like on your job site, trying to get your foundation. I don't know a better way to sum this up than what you just said, Stephen, but you know, in your foundation of your business, just like the foundation of a building, your building you don't pour your concrete wherever you feel like it, you plan for it. Why is your money any different?

Stephen Brown: Yeah. Don't let your money run amok and do stupid things. You gotta control it. You are the boss of your money. It's like having some dogs that you never train. They're running amok and they're making your life miserable. It's your job to train them. And I really do just love all the concept.

And I think about, okay. I'm [00:24:00] freaking out, Wade and Stephen. I'm freaking out. I barely have time to listen to this podcast. And I think of the stewardess saying, put the Oxygen mask over your own face first so you can help others. How many times do people use that in any kind of business analogy? But it's so true.

Right now, if you are hyperventilating, listeners, take that oxygen mask and put it over your own mouth so you can breathe and deal with the situation. We have begged you over the years to have a great financial board of directors. Take a deep breath, talk to them, and then prioritize what you need to do. And then just stay focused on getting that knocked out.

It's just not as hard as you think, is it Wade? It just takes some work. 

Wade Carpenter: Like I said, sometimes you do need a different perspective on some things. So hopefully we've given you a little different perspective. Just thinking of that foundation that I was just talking about. If you're pouring concrete, you want, this is like setting financial rebar, I suppose.

Stephen Brown: Yeah.

Wade Carpenter: You, put [00:25:00] that in there, keep pouring it, so before you pour it on there and it keeps you from cracking under pressure.

Stephen Brown: Yeah.

Wade Carpenter: On that note I think we're getting a little long on this.

Stephen Brown: No. Hey, maybe we did, but go baby. That's what I say to go, just go, go, go, go. This is great stuff and you're gonna love it. Just trust us. I. Give it a shot. It's what we see over and over again. It's a wonderful solution and it's what we're most passionate about.

So we hope you'll think about it.

Wade Carpenter: Thank you, Stephen. Because I, I've seen some huge turnarounds for contractors that actually embrace it, so. 

Well, thank you all for listening to this episode of Contractor Success Forum. If you enjoy this, we do this every single week. Please like, share, subscribe. It really helps us out. Again, our whole goal with this podcast is to find your success in construction. So, we thank you for being here. Have a great week and we will see you on the next show.