The financial secrets of $10MM contractors: Cash flow tips and industry benchmarks

Learn how to project your cash flow so you can hire, spend and scale with confidence.

Key Takeaways

• Poor cash flow management is the reason most businesses fail.
• Invoicing delays and scattered accounts receivable practices can contribute to cash flow crunches.
• Implementing solid job costing, budgeting and cash flow planning systems can help contractors keep their company financially healthy.

A staggering 82% of businesses that fail can blame their demise on poor cash flow management. Even in the trades, a remarkable number of companies have insufficient working capital to cover operational costs. 

From a financial standpoint, it’s like being caught in a riptide slowly dragging you out to sea. But there’s no need to drown in debt. Fortunately, there are systems contractors can implement to help mitigate cash flow issues.

Danny Kerr, Co-founder of Breakthrough Academy and host of the Contractor Evolution podcast presented a web class for contractors that covered both the causes and solutions for cash flow crunches.

What is cash flow?

Cash flow is simply the movement of money into and out of your bank account. For a business to function effectively in the long term, there must be more money coming in than going out.

What are the top 5 causes of cash flow crunches for contractors?

A cash flow crunch is basically when a contractor suddenly discovers they don’t have enough money in their account to cover pending expenses. 

While many scenarios can lead to this unfortunate predicament, here are the main reasons contractors find themselves scrambling financially: 

• Poor (or non-existent) cash flow planning – the contractor isn’t fully aware of when cash is coming, or from where, and when bills are due.
• Seasonal demand – revenue dips during certain times of the year… but the company’s overhead doesn’t. (It’s possible to navigate this, btw! Keep reading…)
• Unfavorable payment terms – contractors don’t collect enough cash up front or throughout the job and are paying vendors sooner than necessary.
• Slack billing – the company is slow to send invoices and lacks a formalized accounts receivable (AR) system, with someone responsible for chasing payments.
• Rapid growth – the company is investing money into growth opportunities that are taking longer than expected to generate returns.

3 systems to help contractors manage their cash flow

By implementing a few financial processes, contractors can give themselves the power to look into the future, in a sense, and keep cash flow crunches from happening.

The three most effective systems for accomplishing this are:

• Annual budgeting

• Job costing

• Cash flow planning

We’ll cover each in more detail below.

Annual budgeting

During the course of assessing thousands of companies, Breakthrough Academy has found that 75% of contracting businesses do not have a basic annual budget. This can be problematic, as working without a clear plan for your corporate spending over the year sets your company up for failure. 

What exactly is an annual budget?

An annual budget is more than just a bunch of numbers in a spreadsheet, it’s essentially a financial overview of strategies for the business that provides decision clarity for the year.

You can learn more about the benefits of budgets in Breakthrough Academy’s webinar.

How do I create an annual budget for my contracting business?

Here are the high-level steps to get you started on creating a budget for your company:

Step 1. Gather financial data

You’ll need the following financial details from your company’s previous year:

• Revenue
• Variable expenses
• Fixed expenses (overhead costs) 
• Profits

Step 2. Do a line by line review

Go through each chart of account (or line item by line item) and wrap your head around the numbers. Consider the following:

• Revenue – If you do different types of work (e.g., commercial, residential, insurance), are you tracking each revenue stream separately? 
• Variable expenses – How much is it costing to do the actual work?
• Fixed expenses – How much is it costing to keep the business operational on a daily basis? 

Step 3. Determine profit margins

Calculate your gross and net profit margins. The gross profit margin is particularly important as it functions like the pulse of the business. It must be healthy, or the business will struggle to survive.

You can learn more about how to calculate profit margins in the Breakthrough Academy webinar.

It’s also worth checking industry benchmarks to see how your business stacks up against the competition.

Step 4. Analyze for opportunities

Once you’ve got a sense of the financial health of your business, look at last year’s numbers again, but this time through the lens of what levers you can pull to improve your profitability. Ask yourself:

• What percentage of your revenue is going towards variable expenses? Materials? Change orders? 
• How is that impacting your gross profit margin? Net profit margin?
• Where can you implement efficiencies to increase your margins?

As you answer these questions, input the new numbers into a budget for the current year, and add notes to provide context for the amounts.

Step 5. Create a strategic plan

By this point, your budget will be taking shape. But don’t stop there! Your new budget should become part of the strategic plan you’ll implement this year.

Step 6. Consider making a back-up budget

You don’t need to only create a single budget and then set it in stone. You can also create a second one with extra contingencies built into it. Think of it like a “Plan B” or “Emergency” budget, in case things don’t go exactly as planned. 

And don’t be dissuaded if that’s the case! Accurate budgeting is a skill that takes time to perfect.

Job costing

What is job costing? 

Job costing involves comparing the actual profit of a job against the profit you assumed as part of the estimate for the job. 

How should I track my job costs?

Each job should be given an ID that allows you to:

• Track which revenue stream it belongs to
• Assign individual costs to the relevant job, including from crew time tracking
• Allocate a proportion of overhead, such as office staff salaries, to the job

What will job costing tell me?

Job costing will show you which projects hit their gross profit targets and which didn’t. You’ll also be able to see which revenue streams are more profitable than others. This data provides visibility that enables:

• More accurate estimating
• Strategic decision making

How often should I do job costing?

Job costing isn’t a task you perform monthly, quarterly or whenever time allows. For it to be most effective, it should be done for every single job as it occurs.

Cash flow planning

Cash flow planning entails keeping a close eye (some contractors do this daily) on cash inflows and outflows to ensure there’s definitely enough money in the account to cover all pending expenses.

What are cash inflows?

Cash inflows are basically the deposits that land in your bank account. They could include:

• Upfront payments you collect when you secure a job
• Progress payments clients make when the job reaches certain milestones
• Sales from corporate assets
• External financing, such as from a credit line

What are cash outflows?

Cash outflows represent the money leaving your bank account. They could include:

• The variable costs paid to carry out the job
• Overhead and admin costs to maintain your office
• Loan repayments
• Taxes

How does cash flow planning help contractors?

Cash flow planning helps your business avoid cash flow crunches, ensuring there’s always enough money in your account to cover your costs. It makes it possible to:

• Handle seasonal revenue discrepancies
• Prepare for tax bills
• Manage investments to scale the business

Breakthrough Academy excels at helping contractors achieve sustainable growth, while Knowify

provides contractors with the vital visibility needed to do accurate job costing.

Watch the full webinar to learn more about how to banish cash crunches from your business.