How Contractors Go Broke: The Cash Flow Trap
Your P&L says you’re profitable. So why is your bank account empty?
In this episode, Wade Carpenter and Stephen Brown break down the real cost of financing your construction jobs before you get paid.
From labor demands and retainage traps to the hidden price of rapid growth, you’ll learn why cash flow, not profit, determines whether your business survives. Plus, discover how holding strong cash reserves gives you negotiating power, better bond rates, and the freedom to take on your best jobs.
Sign up for group coaching to get your Cash Flow MRI
Topics covered on this episode include:
- 00:00 Nail Gun Meets AI
- 00:25 Show Intro And Subscribe
- 02:12 AI As Executive Assistant
- 07:03 Toolbox Talks And Action Items
- 08:52 Better Communication Everywhere
- 11:44 Capture Knowledge With SOPs
- 14:45 Marketing That Stays Visible
- 17:22 AI For Smarter Decisions
- 18:23 Final Takeaways And Wrap
LINKS
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com
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TRANSCRIPT
Wade Carpenter: [00:00:00] Imagine somebody offers to buy you a $100 steak, but there’s a catch. You have to pay for the cow, feed it, butcher it, cook the steak, serve the [00:00:10] dinner, and they’ll reimburse you 60 days later Congratulations. You’re now in construction. Today we’re talking about the part of construction [00:00:20] nobody puts in the estimate, financing the job while you’re waiting to get paid.
Because a project can be profitable, your backlog can be booming, and your company can be growing, [00:00:30] and you can still run yourself right out of cash. This is the Contractor Success Forum. I’m Wade Carpenter with Carpenter Company CPAs, alongside Stephen Brown with McDaniel-Whitley Bonding & Insurance. [00:00:40] Stephen, this sounds completely backwards.
If I’m making money and growing, how in the world can that actually make me more likely to run out of cash?
Speaker 2: We’ve talked [00:00:50] about this, Wade. When you’re growing, it’s sucking cash out. It is, because when you’re growing, you know there’s cash needs. People are frantic. They’re [00:01:00] running around. The job’s gotta get started.
You’re getting pressures from everyone. You wanna get things going so you can relax a little bit. You wanna get it started. I think the whole [00:01:10] idea of this podcast, to let people think about cash a little bit differently. What is cash? What do you need it for? That seems self-evident, [00:01:20] doesn’t it? But cash can mean so many things to a contractor in helping them.
It’s the most fundamentally powerful tool you can have. You might [00:01:30] say, “Oh, it’s okay if I have good credit. I don’t need good cash.” Well, maybe, but if you have good credit, you’re in a backwards position. In some way you’re either paying a higher bond rate [00:01:40] or you’re paying interest on money that you’re financing on this job.
So I was hoping we could kind of talk about that. Why does that happen? What are some common [00:01:50] mistakes that contractors make, and how do you determine exactly what your cash costs are gonna be before you even start a project? It’s very [00:02:00] freeing.
Speaker: Yeah, I know when you brought this one up, I know we talk about cash and cash flow all the time, but for a lot of contractors, whether it is trying to get bonded and get set up where they [00:02:10] can run it, but they may see down the road it’s profitable, it’s cash coming in the door, but to be able to get to that cash, you gotta be able to fund it and float it.
And [00:02:20] so I think that’s where you wanted to go with this today. People underestimate how much it’s actually costing them to actually float that job.
Stephen Brown: And you might say, look, [00:02:30] bonding companies give you working capital credit based on receivables, and that is receivables that aren’t 90 days old, and bonding companies give you [00:02:40] credit for cost in excess of billings that you’ve already put toward working capital.
But that doesn’t mean you’ve got the cash you need.
Speaker: Yeah. Working capital credit for the [00:02:50] bonding company doesn’t pay the bills, doesn’t pay the supplier, doesn’t pay your subs. And again, we talk about that all the time. Your P&L says, “Congratulations, you’re profitable,” and the bank [00:03:00] says, “Where is it?” I think that’s what we want to talk about today, ’cause a lot of people underestimate just exactly how much that’s gonna cost them.
Speaker 2: Right. And if there’s any [00:03:10] entity in a construction company that requires cash- First and foremost and it’s completely inflexible, it’s labor
Speaker: Yep,
Speaker 2: absolutely You don’t pay me, I’m gone. And [00:03:20] I got to be paid weekly. If I could get paid hourly, if I could be paid every day at the end of job, that’s what I want.
It’s brutal, but it’s absolutely the way it works. You [00:03:30] want something done and you find someone, and you want it done fast, and you find someone hungry enough, and you got the cash, you can get it done. But there’s so many other [00:03:40] uses for cash that I hope we would… could get into in this podcast a little bit.
The power of it for negotiating just about everything is just boggles your mind. [00:03:50] So you don’t have cash. We talk all the time about how to get that cash, how to keep that cash, and in your book, Profit First for Commercial [00:04:00] Construction, it’s a fundamental key of how you allocate when that cash comes in, into the right place so that you know at all [00:04:10] times where you stand.
Speaker: Yeah, and the accounting side too. Yeah, we’re gonna account receivable and retainage, but that retainage we may not see for a year or more. The point [00:04:20] is you could be rich in receivables and still go bankrupt. Yeah. So tell me, if you think about it, the cash flow cycle, you’re putting all your money out for labor.
[00:04:30] Suppliers probably want some money up front or whatever maybe, but that is 30 days, 60 days, 90 days is not uncommon.
Speaker 2: You’re mobilizing for a [00:04:40] job- Yeah … and you’re like, “Hey, I got mobilization utilization money in this project.” Yeah, but I’m not gonna get that for 30, 60, 90 days.
Speaker: That critical question is [00:04:50] how much money am I gonna have to put into this project before I get any money back?
And that’s where a lot of people don’t think about. It’s like they just see dollars
Speaker 2: A [00:05:00] lot of contractors do think, “I’m just gonna do business with people that are used to being paid when I get paid.” The paid as paid provision in these contracts, [00:05:10] that’s open-ended to when you’re gonna get paid. Especially what I would like our listeners to think about a little bit, Wade, is when you get paid, how much outlay do you have, [00:05:20] and how much can you get paid at 30 days, 60 days, 90 days?
You’re always behind till the job’s finished and punched out. You’re always [00:05:30] behind the eight ball
Speaker: That clock doesn’t start when you send the invoice. It started when the first payroll from buying all these salaries or [00:05:40] paying for supplies and things like that. Just basically the way I think about it every day between paying for the work and collecting that money is there’s a price tag to it.
And if [00:05:50] you’re borrowing money, you may not think about it. You may have put something on your credit card, but what is that cost?
Speaker 2: Yeah. That’s right. And you always have to think about [00:06:00] not only that, that cost, but a lot of folks don’t think about the time value of their own money. Is it sitting there? What is it doing for you?
You remember [00:06:10] me telling you about a local bank had a series of advertisements. They may have been all around the country with different banks, but it was money with a face dressed up running [00:06:20] around acting like an idiot. And it was basically saying, “This money is an absolute nut. It’s just like a completely dumb teenager, and we as a bank will help you [00:06:30] control that money and get it doing what you want it to do.”
That kind of ticked me off because I was thinking, okay, you don’t need a bank to tell you how to control your money. You need to [00:06:40] learn how to do that, and you need to learn the cost of money. One thing I wanted to bring up, Wade, is this idea of a weekly cash [00:06:50] question. And what does that mean? How much cash every week, you should know this, how much cash do we have?
How much cash is coming in? [00:07:00] When is it coming? How much cash is going out? When does it have to be paid? What projects are consuming that cash? What [00:07:10] invoices are overdue? How much retainage is outstanding? What is our peak cash requirement? How much borrowing capacity remains? So the objective is just not [00:07:20] to know what your bank balance is.
You know, we talk about this so much, Wade, in cash flow discussions because that’s the king. Everything you can do as a [00:07:30] contractor to make your cash flow faster means more money to you. It means more profit. It’s the most important concept we want our listeners to understand. And from a [00:07:40] bonding standpoint, I want our listeners to know bonding companies require that you have cash before they bond you.
I wonder why that is. And the more cash you have, the more [00:07:50] bonding you can get at a better rate with better conditions.
Speaker: Yeah. If we could, maybe just talk about some of the real costs of financing a construction job, [00:08:00] ’cause a lot of people don’t even think about those kind of things. They’ll say, “Okay, I got a line of credit.
I’ll just float this till the receivable.” But you got an interest rate on that line of credit, and you could probably [00:08:10] figure that, but you also think about what’s the opportunity cost on some of this capital. Do you have bank fees? Are you bouncing checks? Supplier… Sometimes suppliers will [00:08:20] tack on finance charges, late payment charges, those kind of things.
So let’s talk a little bit about that. What do you think? What does it really cost the [00:08:30] contractor? What are these contractors not thinking about?
Speaker 2: I think the number one thing, Wade, is that they’re not thinking that without cash, they can’t take advantage [00:08:40] of good situations. A job that may be a little bit before you get paid but has good profit potential, and the [00:08:50] owner’s solid, the financing’s solid, you’re gonna get paid, but they want it done fast So how do you get it done fast?
You gotta pay your labor fast, right? [00:09:00] And you’re gonna be financing that to some degree, and you gotta jump on it fast. Everything about it is an opportunity to make money that you have to say no to. [00:09:10] Yeah, I can’t… That’s straining my workforce right now. It’s straining my cash. Better pass on that. That’s not the end of the world if you have to pass on a job, but [00:09:20] everybody can think back about the job that they took on that was perfect, that their favorite job.
It was a dream job from beginning to end, and everybody’s [00:09:30] always chasing that. So that’s why having that cash is important.
Speaker: Yeah, and I had a situation, I don’t want to tell too many details, but it was a city government [00:09:40] and they had run out of money for streets and stuff like that. But the contractor literally had $6 million in the bank, and luckily [00:09:50] they had that ’cause they stretched them out like nine months.
And when they came back in, they got a whole bunch of money. But in their case, they were borrowing from themselves to [00:10:00] keep floating this. And a lot of people don’t think about… That was a vivid example. Most contractors would never have survived those winter months waiting on that. So [00:10:10] I guess I would ask, just because you’re borrowing from yourself, you really should be thinking like, this money is not free.
Speaker 2: Yeah.
Speaker: Most people are not in that situation, but [00:10:20] cash has rent too, I guess I would say.
Speaker 2: That’s a good analogy. Cash has rent, yes. And also cash is something that you [00:10:30] forget about what that cash is doing for you in your account, and the investment of that cash. A lot of business people in every type of freight [00:10:40] learn investments and how cash works, the compounding interest of cash, usually later in life, unless they majored in banking in [00:10:50] school.
That’s the fundamentals of bankers, is understanding the time value of your cash too.
Speaker: Every dollar that’s tied up on a job is a dollar that’s not [00:11:00] going to fight a fire. I know this is not the same thing, but I remember another one probably 10 years ago. A good friend of mine was a controller at a [00:11:10] large GC.
He was doing about 130, 40 million a year, and they hired a new billing clerk, and she did fine the first couple of [00:11:20] months. One month they forgot to bill, and with that you’re talking about 10 to $15 million a month, and they forgot to bill and nothing was coming in. And [00:11:30] then, “Oh crap, we gotta wait another…”
That about puts this really strong… If you’re in Atlanta, you would know the name. Contractor out of business. That’s why these [00:11:40] big examples are ones that are vivid in my mind, but you just can’t take it for granted
Speaker 2: Yeah, you can’t. And just like that advertisement I was telling you about, the money out [00:11:50] of control, it needs taming, that’s a good analogy.
You automatically think your cash is doing what it needs to do, but is it coming in? That’s your cash. When [00:12:00] you’ve earned it, it’s your cash, right? It’s not coming in, like your example about it not being billed. Wow, what a nightmare that was, [00:12:10] and how much scrambling had to be done for getting a tremendous amount of cash quickly to meet your immediate needs, and how long it takes to [00:12:20] get paid sometimes.
I think about all the time, I guess I bond hundreds of projects that are ongoing at any one day, and [00:12:30] they’re all different. You know who’s gonna pay fast, who’s not gonna pay. You know how it’s paid. And a customer gets into something and they don’t [00:12:40] know that, and they haven’t seen that yet. And you talk to them about it.
“Oh, yeah, we’re good.” But I’ve just seen it over and over again where moving [00:12:50] fast, I’m gonna do this job, I’m gonna make a lot of money. They just don’t comprehend what it’s gonna do to their cash and what it’s gonna do to their credit.
Speaker: Yeah. [00:13:00] Well, I know we were talking before we started the podcast about some of these big jobs and people coming out with…
And from your standpoint, you gotta prove to the [00:13:10] bonding company that you can fund the job. What should a contractor actually start thinking about financing a job from your perspective? I know that’s what you’re selling to a bonding [00:13:20] company. What’s your take on
Speaker 2: that? That’s what the really big general contractors are obsessed with, the cost of financing a job.
A lot of big general [00:13:30] contractors work on low profit margins ’cause they’re working with bit larger numbers. But they’re willing to take a smaller profit margin in order to provide a [00:13:40] vital service to that owner whose cash they’re managing. That makes sense. And a lot of other contractors just don’t see that every bit of [00:13:50] their decision-making process revolves around the management of that cash.
And you got to think, if that’s the way they think, how’s it gonna affect my relationship doing [00:14:00] business with them? Okay. You’ll get paid only as well as your relationship is important to them. And they’ve got to be billing your work in [00:14:10] order for that cash to come in, and you are not gonna get paid until it’s billed.
And you’re like, “Okay, so I’m a little late on my paperwork. Who cares?” Yeah. [00:14:20] Just like this billing clerk, 30 days turns into 60 days into 90 days, and you’re never playing catch up till the job’s over. You’re just not. And even [00:14:30] then you’re not paying catch up. What about disputes over a bill you turn in?
You turn in $175,000 bill and they say, “We only feel like we owe you 75.” [00:14:40] Then you gotta argue about that.
Speaker: I mean, I think about retainage too. We talk about that all the time is that in my vivid example from about 2010 when [00:14:50] all these grading contractors were going out, had a contractor who’s got a sweet $20 million job, or like I said, everybody was bidding the things down and it was [00:15:00] 10% retainage And they were happy that they were gonna get an 8% profit on this.
Like 1.6 million on [00:15:10] $20 million. But you think about that retainage at 10%, that’s $2 million that they literally went out of business because of that. So I know one of your points too was about [00:15:20] retainage. It’s money you’ve earned, but you can’t use. I mean-
Speaker 2: Yeah …
Speaker: what do you think?
Speaker 2: Let’s just think about it, Wade.
You say, “Look, that retainage is just my profit. I’ll take it when I [00:15:30] get it.” But every bit of that money that comes in needs to be allocated into the right bucket, so to speak, including profit. And if you’re waiting till the [00:15:40] job’s over to manage your profit that you’ve already earned, I’ve earned it, and you’re holding this back.
If it’s a bonded project, why [00:15:50] should you agree to retainage? And then they say, “Okay, we’ll lower retainage since it’s bonded from 10% to 5%.” It’s still your profit that’s being held out [00:16:00] when your workmanship and your name have already been guaranteed before you started the project and through the bonding company.
But yeah, so what do you think [00:16:10] about that, Wade? You were talking about 8% profit and 10% retainage. On these high numbers, what is that 2%… What did it do [00:16:20] overall to the cash that contractor needed?
Speaker: We all know the answer to that. He went out of business, but I know I talk about this stuff all the time and in my [00:16:30] book, but I’d love to know from your perspective why growth can create a cash crisis.
Not putting retainage off, when you’re in growth mode, from your [00:16:40] perspective, what do you see?
Speaker 2: As you’re growing, everything else grows. Your back office support, your overhead grows, your equipment needs, [00:16:50] your needs for rental equipment, for credit, for bonding, all of it goes up. And as a result of it, it just puts more [00:17:00] stress on your cash.
It does. It can’t not put stress on your cash. It’s an impossible for one to happen without the other. You say, “No, no, [00:17:10] I’m growing. I’ve got the cash manager. I’m not financing it. I’m getting paid every X number of days.” So fine, that’s fine. But you still have cash [00:17:20] flow needs that are going out. Even if you get paid every five days, you’ve got five days worth of expenses before you get paid.
You can’t think that it’s [00:17:30] impossible for a job to finance itself completely. That’s an impossibility. It doesn’t matter how short of a timeframe you’re getting paid yourself. When you get [00:17:40] paid, it may not be the amount that you bill them for, and it may not be the amount you paid them for, and it also is gonna be X number of days [00:17:50] behind every single time you bill.
And as that goes on, each day that’s behind before it catches up again, you’re going down a little bit [00:18:00] in your cash. Yeah. What would you say about it, Wade? We’ve preached this a million times
Speaker: Yes, we have. And I remember one contractor that was bragging ’cause [00:18:10] it was like six or seven months in, “I’ve tripled my revenue since last year, the last half of the year.”
He was like, he was out of cash. And he ended up [00:18:20] having to slow down considerably and actually had to put the brakes on a lot of things. And I still remember that one too, that people are like, [00:18:30] okay, they get… start bragging about the top line, but that top line, that guy took a huge loss that year.
Speaker 2: Yeah.
Wouldn’t you rather finance your [00:18:40] growth rather than a bank finance your growth?
Speaker: Yeah.
Speaker 2: Think about it. If you don’t have the cash to finance your growth and you don’t know what those costs are as you grow, which you can [00:18:50] figure out, it’s fundamentally simple to figure out. Then you go to a bank and you say, “Hey, I got this great job.
It’s for X corporation, biggest corporation [00:19:00] in town, and here’s a copy of my contract. They’re paying me X amount. I need a little cash to get started on the job.” “Hey, fantastic. Great company. I’ll tell you [00:19:10] what, they made a good choice choosing you.” All right. They’re gonna look at your financials, and they are going to look at your collateral, aren’t they?
Speaker: Yeah.
Speaker 2: And a bunch of [00:19:20] personal money coming into it.
Speaker: Yeah. Somewhere, the money’s gotta come from somewhere, and sometimes the most dangerous sentence in construction can be like, “Okay, we just landed three huge jobs.” That’s [00:19:30] a danger zone. But if we could just, could we maybe shift the gears a little bit? When you do have cash, I know you use the term like cash is like a shock [00:19:40] absorber.
If the flip side, when you do have some of that cash.
Speaker 2: When you do have cash, it’s creating opportunities beside a shock absorber. [00:19:50] You gotta have that shock absorber. And how many times do we talk about the fact that contractors, there is no limit to how much they can lose on a [00:20:00] job, but there is a limit on how much they can make on a job, and that’s very risky business.
But then all business is risky, right? You [00:20:10] control that risk, but cash gives you the ability to negotiate, take early payment discounts when you’re buying materials. Take, for [00:20:20] example, a job that’s got a half a million dollars in materials, and you can pre-pay that and get a 2% discount. You say, “That’s really not that much.”
Yeah, it is. It [00:20:30] totally is. And then you buy materials at a better prices because you’re paying cash. You purchase equipment at the right time because you’ve got cash. [00:20:40] We talked about negotiating better terms with the suppliers. I pay you like clockwork… I’m gonna need 60 days on this or 45 days on this, [00:20:50] and it’s bonded.
You got a copy of my payment bond. You know you’re gonna get paid. I don’t care. Whoever that supplier is, they’re agreeing to it. It’s taken away from their [00:21:00] cash, so you’re gonna pay for it in the end. You’re gonna pay a higher rate for those materials. And then we talked about payment disputes. How do you survive a payment dispute?[00:21:10]
Cash.
Speaker: Yeah.
Speaker 2: So that’s the main points I wanted to make in this podcast. To think about cash as just in a non-emotional [00:21:20] way. You know- Yeah, there’s a
Speaker: lot of-
Speaker 2: Can you do that? Well, you can’t think about cash in a non-emotional way unless you are not a slave to [00:21:30] debt. And when you’re a slave to debt, it’s emotional because it’s stressful, and you can’t think clearly, and you’re in a horrible cycle you can’t get out [00:21:40] of.
It’s the worst feeling in the world, and everybody knows that feeling. Everybody. Well, unless you inherited a ton of money and were very astute at [00:21:50] managing cash, you know that feeling. Don’t let it happen. Take care of business, take care of cash, and let cash take care of your company.
Speaker: I [00:22:00] think it’s well said.
Weather delays, whatever, like sometimes contracts get put on hold, and having cash does give you time to solve some of these things. It gives you some of that [00:22:10] negotiating power you’re talking about. From a bonding company, I know a lot of times when I’m doing my year-end planning, I’ll talk to the bond agent and say, “How much should h- this contractor have at the end of the year to…[00:22:20]
What would you guys be expecting?”
Speaker 2: For new contractors, they’re looking at 10% of working capital. Current assets minus current liabilities. [00:22:30] It’s cash or liquidity. And liquidity is, for bonding companies, is cash in the bank, and also cash value of any life insurance you have, [00:22:40] if you have that. Anything easily converted to cash, and receivables.
And to a small degree, costs in excess of billings. It’s like, why [00:22:50] have you not billed this yet? There’s some appropriate answers to tell the bonding company of why it hasn’t been billed yet. But if you’re constantly underbilled, what’s the [00:23:00] reason for that? What makes sense? And also, as we talk, a huge point I wanted to make, Wade, is that you know the [00:23:10] compounding interest of your cash.
What about the compounding interest of your debt? Yeah. You think it’s not much, it’s, yeah, I borrow $100,000 and [00:23:20] it’ll only cost me $8,000, but it’ll free me up to do this, and, and I can turn around and make 16% on that eight. [00:23:30] So that’s a smart decision. That’s a smart decision to finance it. It’s not really.
What else is involved with you borrowing that money? What else is [00:23:40] involved with not only what it ties up in order to borrow the money, but for what you’re losing out on because you’re not using your own money.
Speaker: We see all [00:23:50] these other, like pay-by-the-week loans, and hopefully they don’t get to the Memphis Mafia money, so…
Speaker 2: Oh, yeah.
Speaker: But, you know.
Speaker 2: You get a title [00:24:00] loan, it’s never paid back unless you just have a windfall of cash. And you get a title loan, you’re giving them your car. In Tennessee, it’s [00:24:10] 36% interest. You never get your car back, no matter how much you love the car. You’re totally upside down to begin with. Anyway, I hope we made some points [00:24:20] that make our contractors think.
If they want to study more about how to manage that cash, the absolute ins and outs, if they thought about this [00:24:30] weekly cash review that I went over and they can say, “Man, I don’t know that. How can I know that every week?” You need to talk to Wade because you need to get [00:24:40] your books in order to be able to answer these questions.
And I told you this story. It was years ago, and you laughed about it, but I was talking to an old contractor and I said, [00:24:50] “How you doing? How’s your business doing?” And he pulled out a big old wad of cash and he goes, “How do you think it’s doing?” And I said, “I think it’s doing great as long as you’ve paid all your bills.”
I shouldn’t have [00:25:00] said that, ’cause that pissed him off. “Let me tell you something, I pay all my bills.” This is a Depression-era contractor where you kept your [00:25:10] cash under your bed. Yeah. So yeah, that was not a good thing for me to say. But at the same time, that’s the first thing that popped into my head, and unfortunately it came [00:25:20] right out of my mouth.
Speaker: It’s probably well justified too. A lot of people, maybe they’re flashing that around, but they don’t have anything in reserve, and [00:25:30] that’s the point of today, is that to survive some of these downturns or a slowdown or whatever, or the growth that you talked about, I think that’s [00:25:40] something that really our contractors should be thinking about, as well as how much it actually costs you to be floating this for a contractor.
So any final [00:25:50] thoughts there?
Speaker 2: You covered it.
Speaker: Okay. Well, with that, we appreciate you being with us. If you did get something out of this podcast, please share and subscribe to it. [00:26:00] We do this every single week, and we will see you on the next [00:26:10] show.