In the construction business, the phrase “keeping the lights on” takes on a literal and figurative significance. Cash flow management extends beyond the individual project budgets—it’s the lifeblood of your entire operation. As Zak Krauss and Brandon Manning outline, it’s not just about ensuring there’s enough money to cover project costs; it’s about the overall financial health of your business, which includes the crucial overhead costs.
Overhead Costs and Retainage’s Impact on Cash Flow
Overhead costs encompass all the necessary expenses required to run your company, such as office rent, utility bills, administrative staff salaries, and their benefits. These costs don’t pause or fluctuate based on project success; they’re constant, demanding a steady cash flow to keep the business functional.
One aspect that’s often overlooked is the impact of retainers or retainage on cash flow. Contractors typically don’t receive the final 10% of a project’s payment until after completion, sometimes longer. Can your business sustain its overhead and continue to finance project costs while waiting for this final payment?
Robbing Peter to Pay Paul
Mismanagement of cash flow can lead a business into a perilous cycle. Utilizing profits or cash from ongoing projects to fund the completion of others, often referred to as “robbing Peter to pay Paul,” can create a snowball effect of financial stress. This is a precarious situation where a business finds itself constantly trying to catch up, a cycle that can rapidly escalate into a crisis if not managed correctly.
Proactive Cash Flow Planning
Effective overhead cost management in construction requires a robust understanding of your business’s financial landscape and proactive planning. It’s about having a clear view of your cash flow to cover both the project expenses and the ongoing costs of operating your business. This ensures that you’re not caught off guard by retainers or delayed payments, maintaining financial stability.
Understanding the nuances of cash flow, from project funding to overhead expenses, is vital. It allows for strategic decision-making that can keep your company from falling into risky financial patterns. By prioritizing cash flow management, construction business owners can secure their operations’ foundation, keeping those lights on and doors open for continued success and growth.