Episode 156 | Cash Flow Mistakes That Can Kill a Commercial Construction Subcontractor Business

A profitable business can still run out of cash.

In this episode of The Mobilization Mindset, Scott Peper and Drew Aldridge break down the cash flow mistakes that quietly derail construction companies—and why profitability and cash flow are two very different things.

They discuss:

• Why profitable contractors still experience cash flow problems
 • The mistakes that turn a temporary cash gap into a crisis
 • Why managing your bank balance isn't the same as managing cash flow
 • How project-level cash flow planning improves business decisions
 • The importance of building a proactive cash flow strategy before growth creates pressure

If you're looking to grow your construction business with more confidence, this episode offers practical strategies to help you stay ahead of cash flow problems before they impact your business.

Learn more: https://mobilizationfunding.com/

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Transcript

SPEAKER_01 0:00

You've seen companies that are incredibly profitable, who actually are starving, and they actually can't operate. They can't accept and grow into what they want to grow. So cash and profit operate on two different clocks. And the quicker you as a contractor realize that, the quicker you can plan for it.

SPEAKER_00 0:24

Welcome everybody to the next episode of the mobilization mindset. My name is Scott Pieper, CEO and founder of mobilization funding. And today, Drew and I are going to be talking about the cash flow mistakes that can kill your business. We have three very distinct questions we're going to review that are going to give you the feedback that you're looking for that you can take actionable and very specific advice to move forward with your business. We found these within our customers and we are going to share them directly with you today. Drew, welcome back, brother.

SPEAKER_01 0:56

I love being here.

SPEAKER_00 0:57

Me too. All right, I'm going to ask you the first question, okay?

SPEAKER_01 0:59

Okay.

SPEAKER_00 1:01

Why can a subcontractor be profitable on paper, job after job, and still run out of cash?

SPEAKER_01 1:08

Yeah. Because profit and cash live on different clocks, they operate on different timelines, right? In contract accounting, construction accounting, your profit gets recognized as you complete work. But everybody out there knows that you don't get paid when you complete the work. You get paid 30, 60, 90 days later. So when you recognize that profit, sure, you're profitable. It feels good. It's vanity. We always say vanity, right? But you're not actually uh experiencing the fruits of the labor through the receipt uh the collections of cash. That's right. And then when you throw on change orders on top of that, you throw on multiple jobs on top of that, cash becomes a real issue. We've seen companies that are incredibly profitable who actually are starving and they actually can't operate. They can't accept and grow into what they want to grow. So cash and profit operate on two different clocks. And the quicker you as a contractor realize that, the quicker you can plan for it. How can a sub be profitable and still run out of cash? You've seen it a million times.

SPEAKER_00 2:22

Yep, and it's simple. The in my there's a lot of ways, but the most common way I see it happen is they have no idea what the cash needs are to execute on the actual work. Give you a perfect example. You got a $500,000 job, you plan on making $100,000, you're gonna spend $400,000 in costs and expenses on your bid, but you have no idea whether you need to spend all $400,000 before you get paid the $100,000 in profit, or spend some portion of it. And if it takes you a month to do the job or two months to do the job, that is gonna have a dramatic impact on how much cash you have in your account.

SPEAKER_01 2:58

Yeah. And that kind of brings me to my my next question is all these con every single one of our customers, every single contractor in the world experiences this at some period of time, right? They they they encounter a manageable challenge, cash flow challenge. But how can you avoid like what causes a crisis? And how can you avoid that crisis, a cash flow crisis?

SPEAKER_00 3:21

There's a couple of things that create the crisis. First is not knowing what game you're involved in, i.e., what we just talked about earlier is cash flow. You don't know what your cash flow is, so you're not measuring it against anything. So once reality is happening, you have no measurement against what you plan for. And your bid is not a plan for cash flow execution. The second thing I would say that occurs and creates a crisis is once you feel the pressure, you emo you react emotionally and you feel the need to grab more cash as the solution. And so you either take it from another job, you take it from someplace that it needed to be spent elsewhere, or you take on debt and even some type of bad debt and pour fuel on top of the fire.

SPEAKER_01 4:08

Yeah. One thing that I've seen over and over again on this particular question itself of, you know, how can you churn a manageable cash flow issue uh and and avoid it or what causes it to go into a crisis? Number one, you're working on job A, you pull cash from job B to put on job A. All the while you start job C, you pull cash from job C to put back on B, and then all of a sudden you have to put it back on A. And then, like I said a minute ago, you add change orders on top of that. Then you look at your bank balance, it's already too late. Simultaneously, while all that is happening, you're saying to yourself, from a profit and revenue standpoint, I'm growing. So I'm gonna increase the resources in the office to support that growth. So your costs go up. Again, you look at your bank account, but once you look at your bank account and your cash is too low, the problem's already been created. That's just that's that's just the smoke. That's not the fire.

SPEAKER_00 5:07

That's right. And the way you look, think about that is you have the expenses you have, you have the revenue you plan to get, you have the investments and costs that you need to make, i.e., new employees, piece of equipment, you have your current debt service, maybe it's equipment, maybe it's insurance, you have your overhead, all those types of things that need to be paid for, fixed cost. And now you're growing, which takes also cash, and I'll get back to it, and you have built no plan to accommodate that. So you have nothing to measure that against. You don't know what costs, or you don't know the amount of cash you were gonna need to execute the actual week-by-week plan. You are just assuming that the amount of money you have in your account and the amount of money that's gonna be coming in your account and has to go out of your account at the times in which it needs to go out is enough. And that is not a plan. And that's why you run into those crises.

SPEAKER_01 6:00

It's it's not. And my question in this I I actually ask this to a lot of our customers, but my question to our audience is if you were unable, it was impossible, it was against the law to take any cash from another job to put it on the job that you're working on right now, would that job be solvent?

SPEAKER_00 6:21

That's a great question.

SPEAKER_01 6:23

Would that, and that goes into managing and planning for your cash flow. I ask a lot of contractors this question as well. Do you have a cash flow? And I leave it broad like that. And they say, Well, what do you mean by cash flow? And I said, You tell me what you mean. And they say, Yeah, I run a company-wide cash flow. And I said, Well, do you run cash flows on each one of your jobs? And they said, Well, no. I said, Well, you're a project, you're a job-based company, you're a project-based company. The main use of cash in your company are the jobs itself and financing essentially your GC or the owner of the project. That's right. Yeah.

SPEAKER_00 6:58

And and if and once you understand that, you can make decisions quickly.

SPEAKER_01 7:01

Yeah. Yeah.

SPEAKER_00 7:03

All right. I got a third question for you. What should a subcontractor actually be doing to stay ahead of cash flow problems instead of reacting to them?

SPEAKER_01 7:14

Yeah, I think number one is uh stop managing your bank balance, start managing your jobs. And what do I mean by that? It goes back to the discussion that I had a minute ago. Do a cash flow for each one of your jobs and try to get it as accurate as possible. And we all know construction doesn't always go as planned. But create cash flows for each one of your projects and then tie them in to a master cash flow. What's the definition of master cash flow? Your company-wide cash flow. So without getting it too granular, it's easy. You have a tab in Excel or whatever program, maybe Sage, uh, whatever program you're using, and you make a job level cash flow that ties into a master cash flow. So then what does that allow you to do? It allows you to look at new jobs, incorporate new job cash flows that you haven't started, and say, what are my cash gaps? Can I afford this from a cash perspective to complete this job effectively on time and without losing sleep at night?

SPEAKER_00 8:15

Yep. Yep. All right, everybody, three quick hits how cash flow is so important. And look, in summary, you gotta have a plan. With a plan, you can make better decisions. When you see the plan ahead of time, you know exactly on how to execute it. Here's what I want you to understand it might be hard to get these cash flows built, but you can get them built by any good accountant. You can call us and we can help you build these cash flow tools. And I want to promise you, every single time we ever build a cash flow on a project, a construction contractor of all kinds have been able to make great and much better decisions. It is not that you do not know how to make the decision. I promise you, it is the fact you don't have the information. So I hope this video helped you. These are three great questions that we answer all the time. I hope you found some advice. I hope you found some things that can work for you. If you did, please share them. You can check out our YouTube channel at mobilization funding, our website at mobilizationfunding.com. And until next time, have a great week and may God bless you.