The reaction to sustained negative cash flow is often swift and dramatic, including reducing staff and slashing budgets. These approaches can bail a company out of immediate danger, but usually do not address the fundamental reasons why the organization fell into a bad cash position. Plus, the short-term fixes can hurt a company’s ability to remain profitable in the long run.
Taking a long-term view on positive cash flow requires discipline and commitment. Most managers know how to save money today, but ensuring a company stays in the black requires a strategic approach to business that drives all the company’s activities and investments.
Every company has different cultures, management styles and business objectives, but every successful contractor shares one common trait: a sustainable approach to maintaining positive cash flow. The most effective cash flow management techniques focus on connection and collaboration.
Connecting People
Frequently, a disconnect exists between a construction company’s office and field staff. If the proverbial right hand does not know what the left hand is doing, or finds out too late, decisions can be made that put a company in financial jeopardy.
Choices that affect cash flow are made daily in the field, while financial analysis and tracking occurs at the office. If there is a time lag or inaccuracy in the data shared between the two, decisions will not be based on a company’s real cash position. For example, if a project manager falls behind logging job progress, billing also stalls. The contractor, in effect, takes on a larger role in financing the project and has less cash available—cash that could be applied to other projects, winning new work or obtaining vendor discounts with bulk purchases.
In another example, an office manager with a good working relationship with a supplier may arrange to delay invoicing for a particular project until near completion. Holding onto cash longer is a good thing, but now the project costs do not reflect reality because costs that should have been applied earlier in the project hit all at once at the end. What was expected to be a highly profitable job turns out to be marginal. The real problem is the projected profit, which no longer exists, was already committed to other projects or business initiatives.
Connecting construction accounting with operations gives everyone the data they need to prevent these cash management miscues. To test office and field connectivity, construction executives should ask the following questions:
- How accurate are job profitability projections? As jobs approach completion, projections and actuals should merge, not diverge.
- Is the information available to create accurate cost-to-complete projections?
- How much time transpires between change order work completion and billing?
Connecting Companies
Construction is rarely, if ever, a single-company endeavor. Project teams composed of general contractors, subcontractors, suppliers and architects depend on each other to get work done. This dependency extends to everyone’s bottom line.
If project information is not actively shared among all players, the risk of mistakes and delays on the jobsite increases. Active and consistent sharing of job information is key, but often ends during the bidding process. Contractors that find a way to stay connected throughout construction can bring order and predictability to projects. In turn, everyone involved in a project can manage their work and cash flow.
Change is inevitable in any project, up to the final punch list. To work efficiently and prevent costly delays and mistakes, all project participants must be notified of changes as they occur, adjust their plans and schedules, and share those changes with others in a timely fashion.
The volume and complexity of information associated with the average construction job is increasing, and will continue to do so. As a result, project collaboration must be about more than communication.
In order to truly stay connected, contractors need more robust tools than email and online file repositories. They must be able to filter huge amounts of changing project information and quickly identify the issues that affect them. They need to submit changes and count on their project partners to take them into account.
Achieving this level of collaborative work requires the creation of an online work environment where partners share an intelligent information platform and a common set of tools and standards. Efficiently working together away from the jobsite is becoming as important as working well onsite. Tools and standards for the creation and use of this new virtual jobsite are needed.
Connecting Technologies
For years, vendors of high-end software systems have been working to deliver office and field integration, but building information modeling (BIM) has struggled to move from the world of design and engineering into construction.
Why has the adoption of integrated software been slow and why are BIM and integrated project delivery (IPD) often more a topic of discussion among contractors than a way of working? To anyone who has attempted to introduce new technology, the answer is clear: Change is hard. New technologies rarely begin by making anything easier. They aim to solve a problem or fill a need, but when first introduced, the effort required to use them can be more painful than the actual problem.
A tipping point always exists for technology adoption, and it can be measured in terms of ease of use and access. Software systems that connect the field to the office usually try to make office-oriented applications fit the world of the project manager. The result has been systems that add to the already complex workload of construction operation managers.
New collaboration standards such as BIM and IPD deliver added dimensions of complexity in construction. So, unless it is a project requirement, many contractors do not actively adopt these standards. As a result, project collaboration is unstructured and inconsistent, and project partners remain disconnected.
The task at hand seems daunting: Connect contractors internally and externally and improve work and cash flow without introducing complexity. Fortunately, the combination of web-based computing, ubiquitous Internet access and a new generation of portable hardware is driving vendors to create a new class of business software.
Making complex enterprise software accessible via the Internet is not new. Virtualization technologies have been around for years and are still the default answer to the problem of accessibility. But they do not touch the issue of usability. True web-based solutions include software designed specifically for Internet access from any place, using any device. To build business software for this environment, developers are redesigning user interfaces to be simpler without sacrificing functionality.
This confluence of technologies is occurring just in time to help the construction industry reconnect, encouraging tighter integration between the field and the office, as well as the adoption of new collaboration platforms. With these improved workflows come healthier cash flows—a connection every contractor is happy to make.