Going With the Flow
Cash Management in the construction industry is a make-it-or-break-it piece of financial administration. The flow of cash in a business is the equivalent of the flow of blood in a body.
At its most simple in business accounting, cash flow looks like this:
Sale is Made
Customer Pays You
Money is Deposited
You Pay What You Owe
Another Sale is Made
And so on
Yet, you know that in the construction world, that simplicity goes awry. Net 30, 60, or 120 days; percentage of completion; change orders; and many other “complications” come into play. The weakest point of the above list happens at “Customer Pays You.” That leads to the problem that the timing of cash coming in seldom neatly matches the timing of payments going out.
And that’s why envelope-style cash management becomes even more significant for construction contractors.
First – A Little History
Envelope-style cash management isn’t something new or unproven. It is a long-time trusted method for controlling the flow.
My first introduction to envelope-style cash management was in my homeroom class in seventh grade when our teacher, Mr. Stevenson (a student favorite,) explained how to divide our cash by category into envelopes. Meager allowance issues aside, Mr. Stevenson’s method stuck with me – although I only used his method occasionally and somewhat haphazardly.
Later, I learned that my late husband’s sister, Dora, and her husband, Chuck, had used this money management style throughout their marriage. Dora has since passed away, but her 90-year-old millionaire husband still uses this management system.
Even later, Dave Ramsey, a personal finance personality, became well-known for his teachings concerning personal envelope-style money management. His book Financial Peace, published in 1992, was the first of many he has written teaching people how to be more responsible with their finances.
Then came Mike Michalowicz’s book, Profit First, which moved the envelope-style management system into the business world. Of course, the envelopes are replaced with bank accounts, but the methods are much the same.
Here is why.
The traditional profit formula looks like this: Sales – Expenses = Profit
The new profit formula looks like this: Sales – Profit = Expenses
It boils down to paying yourself first (you know, the profit part) and then funding everything else.
Applying a Digital Approach
The envelope system is a way to know how much money you have in each budget category for the month. And one benefit is that it compels you to stop overspending. It allows you to set goals and evaluate how much you spend and for what it is spent.
Taking away the physical aspect of actual envelopes and replacing them with bank accounts moves the practice into the digital realm. This doesn’t take away from the psychological benefit of the envelope-style strategy of dealing with cash flow. For example, it helps you make better decisions about where to invest your profits as your construction business grows. And it provides a cash flow boost that can allow for capital purchases, salary upgrades, or other cash-necessary enhancements. Or it may become a lifeline during downtimes.
There are two essential components of applying this strategy.
Find the Right Bank
One component is finding a bank that allows you to open several accounts – some of which will have a low balance occasionally. Look for a business bank that doesn’t charge minimum balance fees and allows the creation of multiple accounts at no additional cost.
Choose the Right Accounting Professional
The other component is finding an accounting pro who understands the envelope-style strategy and is willing to set up and use the appropriate accounts to make this system viable.
And, ahem, you may have guessed (it’s in our name,) The Profit Constructors has a team of accounting pros who believe in using this strategy and are adept at applying the concepts to take small to medium-sized construction contracting businesses to more profit.
Take Charge, Not Chance
It is true; we help our clients Run With The Big Dogs! One of the ways we do it is to help them understand and use the envelope-style method of cash management.
Ambitious Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:
Clients and customers
Employees and subcontractors
Vendors and service providers
Governmental entities
Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:
Remain informed
Avoid hassles
Reduce risks
Be future-ready
Ready for action? Or want to know more? Get in touch today to schedule a complimentary discovery call. 866-629-7735