Best of Success Seminar: Get a Better Handle on Your Cash Flow
Managing cash flow in a business is tough enough, but for companies in the construction field, it is even tougher. Inventory and expenses can be tied up in projects for months, and multiple ongoing projects can make accurate accounting a challenge, to say the least. Stephanie Gaydosik, CFO of ProTouch Restoration, a full-service restoration contracting company headquartered in Cincinnati, found cash flow fluctuations were intensified with insurance-related work. “We knew we had to have a solid way to manage our cash flow,” she said. “We had to be able to know in real time how much we had invested in our ongoing projects.” The answer was to convert the system to reflect the expenses for work that was currently in progress, and she shared her solution with attendees at Best of Success in a presentation titled “How We Use Work-in-Progress Billing to Manage Cash Flow and Expenses.”
“Wouldn’t you love to have a way to forecast cash flow fluctuations before they happen?” she asked the audience. “You’ll be able to do that with work-in-progress billing, or WIP.”
According to Gaydosik, WIP identifies the value of construction projects that are currently in operation. To properly account for each project, four values are needed:
- The contract amount for the project.
- The total cost budget for the project.
- The actual project cost to date.
- The income collected from the customer to date.
She walked Best of Success attendees through sample WIP reports, demonstrating how companies can easily compare actual costs vs. budgeted costs, and break information down by the scope of work (for example, roofing, windows, siding and gutters). The information can be sorted for each sales rep, making it easy to track commissions.
According to Gaydosik, there are numerous benefits to WIP accounting. It can help you:
- Access real-time reporting of expenses paid to date on jobs in progress.
- Plan for large purchases.
- Monitor actual expenditures for each job compared to budgeted costs.
- Calculate the percentage of completion for each project.
- Forecast future income and profit.
- Manage cash flow.
She cautioned that while there are some accounting programs that are customized to track work-in-progress expenses, many commonly used programs are not. There’s hard work involved in making the transition to WIP billing, but the benefits are well worth the effort, noted Gaydosik. “The ultimate goal is supreme cash flow, with no more juggling due to surprise expenses,” she said. “Make sure you are not spending your profits before you realize they are gone.”
The system can accommodate various payment options. “If your company chooses to bill upon completion, knowing your budgeted cost will allow you to determine if your down payment is sufficient enough to start the project,” she said. “It is important that the down payment or progress billed amount requested and collected is equal to or greater than the costs expended to complete the project. This will ensure that the customer is directly funding the project and will minimize the amount of risk and borrowing the contracting company must do on behalf of the customer.”
Gaydosik recommends companies set up a schedule for reviewing your WIP expenses, budgeted costs and funds collected with your operations and administration departments. The meeting can be held weekly, monthly or quarterly, depending on workload. She also suggests maintaining a cloud-based purchase order log accessible by the operations and administration departments to track all expenses. This can minimize theft by crews and reduce inaccurate billing from vendors.
Her final piece of advice? “Hire an accountant that understands work-in- progress accounting for construction.”