Key Principles For Good Cash Flow Management

To most effectively handle your business’ cash flow, more than just accounting personnel should be involved

Key Principles For Good Cash Flow Management

To optimize cash flow management, it's important to also have field operations personnel weighing in.

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Without good cash flow, it can be difficult to take care of business essentials such as paying employees and subcontractors, purchasing materials or buying equipment. 

The larger the company, the more finance people you may have in place to help manage this key task. But good cash flow principles go beyond your finance people.

Steve Lords, vice president and chief financial officer of Arizona Pipeline Company, has made it a mission to educate the construction industry on this topic. He’s taught courses on cash flow for the Construction Financial Management Association (CFMA), and has taught it at every construction company he’s worked at since he first became involved in construction finance more than 30 years ago.

According to Lords, operations and corporate management typically view cash flow as a topic for financial mangers only. Meanwhile, financial managers of construction firms get frustrated because their policies can only do so much to control cash flow.

Lords says that to be effective, financial managers have to get out of their offices and start educating operations personnel on how their actions impact cash flow. But in Lords’ experience, without top management’s support, their suggestions are likely to fall on deaf ears.

The Largest Numbers On Your Balance Sheet Aren’t Controlled By Accounting

“Take the largest numbers on a construction company’s balance sheet, and you’ll see that accounting really doesn’t have control of these areas,” Lords says.

For example, accounts receivable and billing is controlled by project management. 

“They know the jobs better than anyone else, so they control this driver,” says Lords.

Accounting may establish company standard policies for accounts payable, but Lords says that control is limited.

“It’s operations that engages new vendors and subcontractors, and they may arrange different terms than is desired for good cash flow,” he says. “Operations also reviews, codes and approves job related costs, and may or may not process invoices and pay requests on a timely basis.”

Costs in excess of billings and billings in excess of costs are other areas that are largely controlled by operations, since these accounts are the result of ongoing billings and job costs.

According to Lords, although the finance department may arrange financing for new equipment, they typically don’t authorize equipment purchases, and they don’t manage and monitor the efficient use of equipment on the jobs. Again, this is usually a management and operations function.

Surprisingly, few accounting people are involved in reviewing contracts before the job is bid and awarded and the contract signed. When Lords asks the question in educational sessions, he says fewer than 10% of companies have finance review the contract terms.  

Take Time to Train Non-Financial Managers on Cash Flow Principles

The solution is education, but in order for that to be effective, Lords says top management needs to incentivize operations. 

“In most construction companies, the controller or CFO does not have the clout to require cooperation in the training and implementation of cash management policies and practices,” says Lords.

One construction company where Lords worked required operations managers to pass a test on the company’s financial statements in order to receive some portion of incentive bonuses. He says it was extremely effective.

Unfortunately, it’s difficult to track a single metric that shows the impact of better cash management. Instead, Lords points to the overall success companies are able to achieve when everyone is working toward the same goal.

Lords’ company, Arizona Pipeline, is a good example. The company, headquartered in Hesperia, California, and licensed in seven states including Arizona, California, Nevada, Utah, New Mexico, Oregon and Washington, had a record year in 2017.

“In 2018, our revenues were not quite as high, yet our profit was nearly equal to the prior year,” Lords says. “I don’t think that would be the case without a full company focus on cash management.”

About the Author

AEM is the North American-based international trade group representing off-road equipment manufacturers and suppliers, with more than 950 companies and more than 200 product lines in the agriculture and construction-related sectors worldwide. AEM has an ownership stake in and manages several world-class exhibitions, including CONEXPO-CON/AGG.



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