Sheet Metal & Air Conditioning Contractors’ National Association

Cash Flow Forecasting: A Powerful Tool in Your COVID-19 Recovery

Ron Eagar_CroppedPR 250x322The COVID-19 pandemic brought with it a wave of changes to the construction industry —  some temporary, some permanent. The 2020 job site shutdowns had wide-ranging effects on construction contractors’ financial positions. While the long-term outlook is uncertain, there were some interesting immediate observations.

Some contractors found themselves unexpectedly in a stronger-than-usual cash position, as requisitions for pre-shutdown months — and even some lingering from 2019 — were collected in the normal course of operations. Since there was little to no work in place on shuttered jobs, the normal cash outflow of building costs was temporarily slowed. Add the influx of cash from Paycheck Protection Program (PPP) loans, and some contractors felt like they escaped the crisis relatively unscathed.

As wonderful as this scenario sounds, it was temporary. The next wave of cash collections started to stall as there were very few requisitions submitted during the COVID shutdown period when little was being done outside of essential construction. Everyday overhead costs (rent, utilities, office salaries, etc.) continued, including the drain of seemingly never-ending increases in insurance costs and normal debt service payments.

When job sites remobilized, there were increased cash outlays; in addition to the normal costs of running a construction project (labor, related benefits, materials, and other job costs), there were also heavy investments in expanded hygiene training, PPE, and enhanced cleanliness and virus screening protocols. Compounded by reduced productivity on jobs due to social distancing and staggered or reduced shifts, these changes inevitably constrained cash flow and impacted financial results. 

Given that the pandemic has impacted every construction company differently, and each job has its own unique ecosystem, profit and loss and cash flow cycle, a one-size-fits-all approach to cash management is unrealistic. However, there are financial management tools every construction company can use to customize their financial plans in 2021 and beyond.

One of the most important tools for a construction company to employ, regardless of the times, is a cash flow forecast. Done properly, and both on a job-by-job and company-wide basis, this forecast will aid the construction company’s financial professionals in identifying where there could be cash shortfalls (and surpluses) throughout the lifecycle of each project, as well as in the company as a whole. This proactive tool also allows for adequate time to remediate issues and mitigate negative effects before it is too late and the contractor finds themselves in the cash flow downward spiral of no return. The savvy construction financial professional can see the power of cash flow forecasting in times like these.

But the cash flow forecast will be only as good as the amount of teamwork that goes into it. This must be a coordinated effort with the project teams on each job, which knows the timeframes within which various aspects of a project will be performed. The project team can also provide much-needed insights into anticipated cash outflows throughout the timeline, estimated costs of activities yet to be performed, and an expectation of when the remaining progress billings will be submitted and trigger cash inflows.

Armed with that intelligence, the financial team, including your CPA, can rely on actual project data and the company’s historical performance to develop cash flow projections and make recommendations based on possible deterioration of available work, reduced growth, reduced overhead, and/or the potential need for additional capital infusion.

While this can be a large initiative to undertake at any time, especially during a pandemic, cash flow forecasting is a critical task. The results yield key financial information that management needs to make confident decisions about the future of the business and maneuver around potentially devasting pitfalls.

Best practices recommend cash flow forecasts that take a six- to 18-month rolling lookout. In light of ongoing volatility, consider a rolling eight- to 24-week model that is constantly monitored and updated. Remember, this is a forecast based on assumptions and information available to you at a specific point in time. A forecast should be regularly updated as information and assumptions change.

By all indications, at the initial onset of reopening and changing job sites, there seemed to be little immediate negative impact to the construction industry. But as backlogs are burned off and the future of capital programs across agencies remains uncertain, financial positions could change quickly and drastically. Arm yourself with the knowledge of potential company-wide effects and the confidence of long-term planning, and you will be prepared to face whatever the immediate and long-term future holds.

Ronald J. Eagar, CPA, CCIFP is a construction partner and COO at Grassi. Ron can be reached at reagar@grassicpas.com.

Carl Oliveri, CPA, CCIFP, CFE, M.B.A., is the construction practice leader at Grassi. Carl can be reached at coliveri@grassicpas.com.


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