Cash flow is critical to any business, and a positive cash flow enables a company to be profitable and to remain in business. A negative cash flow moves a company toward financial failure. With a negative cash flow, money is sucked out of the company, and at some point, the company runs out of cash and even runs out of the ability to borrow money. Without money to operate, the company is forced out of business. In electrical construction, company projects are the primary contributor to cash flow. Thus, project cash flow is of fundamental importance to any electrical contractor.

In the next few articles, we will take a look at cash flow with an emphasis on the field supervisor’s influence. This article defines cash flow.

The basics

Companies spend money to operate. Therefore, to stay in business, they also must bring money in. To be profitable, they must bring in more money than they spend. The movement of money through a company is called cash flow, which is the basis for all business operations.

In construction, projects form the basis for cash flow. A company’s cash flow is directly linked to its projects. If projects have a positive cash flow, the company will prosper. If projects have a negative cash flow, the company loses money.

As a contractor performs work on a project, it invests money in labor, tools and equipment. Since it is difficult and costly for a contractor to finance an entire job until it is finished and then bill for the contract amount, most contracts allow periodic billing (e.g., monthly) for costs incurred.

A cash influx to support project operations can come from reserves or from borrowing money. Regardless of the source, there is a cost. Either the company pays interest on borrowed money, or company cash reserves are not available to be invested and to earn a return on that investment. In order to offset this cost, the company must charge the amount the project costs to provide this financial support. Unless the cost of financing the project is accounted for by a specific line in the project estimate (which is rare), it must come out of the estimated profit for the project. As a result, the more company money used to finance a project, the less profit that project makes. It is easy to conclude that an otherwise profitable project could become unprofitable if the company has to invest too much working capital in it.

How you fit in

The field supervisor, together with the project manager, has a great deal of control over how money is invested and how it is recovered through the monthly draws. It is a primary responsibility of both the field supervisor and the project manager to minimize the amount of company money invested in the project over time by maximizing the amount of money recovered on a monthly basis.

With this understanding of cash flow, we can draw another conclusion about its nature and profitability as a whole. It is possible for a project to have a reasonable profit built into the budget, but if the company cannot get to the money on a timely basis—if the project does not have a positive cash flow—the company may need to draw on its reserves, if the company has any. Doing so sucks the profit out of a project and pushes the company toward its cash limits. The end result is the company going out of business. Unfortunately, many electrical contractors go out of business, not because they do not have enough profit built into the projects, but because they cannot get to the money on a timely basis.

Many elements of cash flow management are outside the control of the field supervisor. They have to do with such things as contract clauses relating to payments, the design of the schedule of values that forms the basis for monthly billings, and office procedures that ensure the contractor is paid promptly. However, there are many things the field supervisor can do to have a significant impact on the cash flow of the project, including accurate reporting, wise planning and sequencing of work, and efficiently closing out the project in part or as a whole.

Next month, we will look at some of these areas in which the field supervisor can impact project cash flow.

ROUNDS is the AGC endowed chair and professor of civil engineering at the University of New Mexico. E-mail him at [email protected]. SEGNER is a professor of construction science at Texas A&M University. Contact him at [email protected].