Last week we established that the high failure rate in the construction industry comes down to a single cause – a shortage of working capital.
Some blame failures on a whole variety of causes: labor unrest, natural disasters, economic stress, market shrinkage, unfair competition, or natural disasters. But the main cause of construction business failures is – simply running out of money. And it surprises everyone in the company. They didn’t realize they were about to run out of cash and will have to close the doors.
In the Event of a Crash
Whenever anyone witnesses a serious car crash the first thing they think to do is call 911. We all know instinctively that we don’t possess the skills the injured need. So we quickly call-in experts.
When construction firms ran out of money and projects suddenly came crashing down some years ago the sureties called in my company to perform emergency triage and restart ‘the heart’ of the projects that had gone dormant. We were able to save thousands of projects, but it was usually too late to save the construction firms. They expired.
Construction industry balance sheets need a specialist’s care long before a company comes crashing down. After the crash it’s too late. Much like aging medical patients that develop a hidden chronic illness, construction professionals have no idea their companies need care. As long as they have been able to find enough working capital to complete past jobs, companies think they have matters in hand. Then suddenly to their complete surprise, the company has a financial ‘heart attack’ and goes out of business.
Is There a Doctor in the House?
The only way to avoid an unexpected financial ‘heart attack’ is to have a doctor look at the vitals early and often throughout the economic life of a company. The first expert a contractor should employ, before an estimator or project manager, is a Chief Financial Officer. Few contractors I have met agree with me on this.
It Takes More Than a Village
Too many contractors promote their bookkeeper to accounting manager and never employ a professional CFO. Then they take financial advice from golfing partners who are in the ‘financial’ business (usually stockbrokers who are salesmen, not accountants) and rely on the consensus of trusted employees who have been promoted to executive positions from within the firm. These are highly competent managers and builders, but not CPA trained financial executives.
It Takes an Expert!
Construction CFOs are the financial business experts (doctors) who will read your company’s balance sheet ‘vitals’ and prescribe the corrective measures to keep your company financially healthy going forward, thereby avoiding the surprise financial ‘heart attack’ that has brought down so many otherwise competent contractors.
Just like your heart doctor who insists you quit smoking or they won’t be able to save you from a future heart attack, professionally trained CPAs functioning as respected construction CFOs won’t let an ongoing construction firm suddenly run out of money. They have been trained in the concept of ‘working capital capacity’ and constantly monitor the complex factors governing healthy cash flow and financial health.
Before the firm signs any construction contract, the CFO should conduct an extensive working capital capacity analysis to assure the company will have access to working capital sufficient to complete the proposed contract.
No Surprise – It’s a Surprise
Without the guidance of a competent CFO cash flow is a constant challenge in the construction business. Construction firms rarely have the capital on hand to finance growth going forward. Banks don’t provide enough working capital lines of credit because the assets being built by the company for clients are not available for collateral. Contractors have little or no access to public stock markets where the motherlode of growth capital for other industries resides.
To free up cash flow contractors are often ‘forced’ into bigger and bigger jobs to finance the dried-up cash flow from previous projects with delayed payments for work in progress. Owners too often save money by delaying payment to contractors for one reason or another. Contractors are unable to pass on ‘payment delays’ to trades people or subcontractors and still expect them to keep working. Extending payment terms to material suppliers can only go so far before it backfires.
Next Week
The pre-contract working capital analysis conducted by competent construction CFOs eliminates these negative factors. We’ll show you exactly how they do it.
For more information on the role of a CFO read more at: CFO
For a broader view of importance of cash flow, read more at: FLOW
To receive the free weekly Construction Messages, ask questions, or make comments contact me at research@simplarfoundation.org.
Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.
