This process, performed in conjunction with cash flow forecasting, will empower the construction contractor to maximize the balance sheet
Lost profits are measured as the difference between: the cash flows that the injured party expects to earn as a consequence of the alleged breaches, the “Actual Scenario”; 4 and the cash flows that the injured party would have earned ‘but for’ the alleged breaches, the “But For Scenario”. These scenarios can be assessed using a discounted cash flow (“DCF”) analysis
In circumstances where the business is not easily sold to a third party and/or the owners desire to provide for continuity, an ESOP can be a great solution for the owners and the company; they can obtain liquidity, and the company can operate with improved cash flow. There are some unique issues that construction companies need to address in implementing an ESOP, particularly with regards to sureties and any new debt that is incurred by the company to complete the ESOP transaction
Look to documentation of real-time conditions from the onset of the pandemic, including project shutdown notifications, board minutes/internal memos discussing management’s decisions to lay off employees, and any other impactful documents to help paint this picture. Live Your Cash Flow Forecast and Budgets Enough cannot be said about these tried-and-true construction financial management tools – they are the life blood of any successful contractor
Xavier says healthy benchmarks for contractors include: • Cash greater than 5% of annual revenue • A line of credit of at least 5% of annual revenue • Tangible equity (which excludes goodwill prepaid expenses) greater than 10% of annual revenue • A current ratio (current assets divided by current liabilities) that is at least greater than 1.0 • Tangible working capital of at least 7.5% of annual revenue • Minimal underbillings on their projects • Minimal bad debt or aged accounts receivable (past-due more than 90 days) • No significant gross-profit-margin fade on projects Meanwhile, some of the strongest indicators that a contractor could be in a precarious financial position include: • Overall underbillings greater than 10% of equity • Significant claims or unapproved change orders outstanding on construction projects • Interest-bearing debt greater than 100% of equity — that is, if a company owes more money to banks and lenders than what the company's owners have invested in it • Total liabilities exceeding 300% of equity • Significant gross-profit-margin fade on projects In severe cases, these financial shortcomings can put contractors at risk of failure. One such example is large past-due accrued liabilities related to payroll taxes or union-benefit liabilities, which is a sign of cash-flow problems and can lead to significant penalties and fines, Xavier says
“Make sure there are no surprises.” It takes cash to keep a construction operation going, and tax bills reduce liquidity. So Molloy advises construction contractors on how to organize their accounting systems and tax strategies to maximize cash flow. “The more cash they can have on hand the better for day-to-day operations,” Molloy said
As a contractor, there are various items to consider that can help defer income and minimize taxes in the current year. Given that cash flow management is paramount to most contractors, taking advantage of the multiple opportunities to preserve cash flow and adequately manage tax burden is vital
Increased subcontractor default Subcontractors have had to shoulder substantial additional costs in the past year, totaling over $97 billion, 3 creating cash flow problems and making subcontractor default a significant concern across the construction industry
KEEP IT NEAT AND TIDY Your records are the heartbeat of your business, allowing important details to flow to various internal departments, as well as outside regulators, lenders, and other important partners
Also read about our first four strategies to help your construction company navigate the year ahead: Strategy #1: Get Ready for Your Paycheck Protection Program (PPP) Audit Strategy #2: Live Your Cash Flow Forecast and Budgets Strategy #3: Evaluate Your Income Tax Strategies Strategy #4: Don’t Neglect Your Succession and Estate Planning Carl Oliveri is the Construction Practice Leader and a partner at Grassi