Cash Flow Forecasting: A Powerful Tool for COVID-19 Recovery

The COVID-19 pandemic has brought with it a wave of changes to the Construction industry: some temporary, some permanent. The March 2020 job site shutdowns had wide-ranging effects on construction contractors’ financial positions. While the long-term outlook is uncertain, there were some interesting immediate observations.

For example, some contractors found themselves unexpectedly in a stronger-than-usual cash position, as requisitions for January, February and even some lingering from 2019 were collected in the normal course of operations. Since there was little to no work in place on shuttered jobs, the normal cash outflow of building costs was temporarily slowed. Add to these factors the influx of cash from Paycheck Protection Program (PPP) loans, and some contractors felt like they escaped the crisis relatively unscathed.

As wonderful as this scenario sounds, it was temporary. The next wave of cash collections started to stall as there were very few requisitions submitted in March, April and May when little to no work was being done, outside of essential construction. Normal everyday overhead costs (rent, utilities, office salaries, etc.) continued during this period, including the continued drain of seemingly never-ending increases in insurance costs. When job sites remobilized, there were increased cash outlays; in addition to the normal costs of running a construction project (labor, related benefits, materials and other job costs), there were also heavy investments in expanded hygiene training, personal protective equipment, and enhanced cleanliness and virus screening protocols. Compounded by reduced productivity on jobs due to social distancing and staggered/reduced shifts, these changes will inevitably constrain cash flow and impact financial results.

Given that the pandemic has impacted every construction company differently, and each job has its own unique ecosystem, profit and loss and cash flow cycle, a one-size-fits-all approach to cash management is unrealistic. However, there are financial management tools every construction company can use to customize their financial plan for today, the balance of the year and well into 2021.

One of the most important tools for a construction company to employ, regardless of the times, is a cash flow forecast. Done properly, and both on a job-by-job and company-wide basis, this forecast will aid the construction company’s financial professionals in identifying where there could be cash shortfalls (and surpluses) throughout the lifecycle of each project, as well as in the company as a whole. This proactive tool also allows for adequate time to remediate issues and mitigate negative effects before it is too late and the contractor finds themselves in the cash flow downward spiral of no return. The savvy construction financial professional can see the power of cash flow forecasting in times like these.

But the cash flow forecast will be only as good as the amount of teamwork that goes into it. This must be a coordinated effort with the project teams on each job who know the timeframes within which various aspects of a project will be performed. They can also provide much-needed insights into anticipated cash outflows throughout the timeline, estimated costs of activities yet to be performed and an expectation of when the remaining progress billings will be submitted and trigger cash inflows.

Armed with that intelligence, the financial team, including your CPA, can rely on actual project data and the company’s historical performance to develop their cash flow projections and make recommendations based on possible deterioration of available work, reduced growth projections, reduced overhead structures, and/or the potential need for additional capital infusion.

While this can be a large initiative to undertake, especially midway through the year and during a pandemic, cash flow forecasting is a critical task. The results will yield key financial information that management will need to make confident decisions about the future of the business and maneuver around potentially devasting pitfalls.

Best practices recommend cash flow forecasts that take a 6 to 18-month lookout. But considering the volatility of the world right now, consider a rolling 8 to 24-week model that is constantly monitored and updated for actual results. Remember, this is a “forecast” which is based on assumptions and information available to you at a specific point in time.

By all indications, at the initial onset of re-opening job sites, there seemed to be little immediate negative impact to the Construction industry. But as backlogs are burned off and the future of capital programs across agencies remains uncertain – watch this one carefully! – financial positions could change quickly and drastically. Arm yourself with the knowledge of potential company-wide effects and the confidence of long-term planning, and you will be prepared to face whatever the immediate and long-term future holds.

Carl Oliveri Carl Oliveri is the Construction Practice Leader and a partner at Grassi. He has over 25 years of experience advising owners and executives in the Construction industry, particularly in project-centric and companywide financial modeling, operational strategy development, financial statement accounting services and income tax method analysis. This extensive industry experience allows him to provide insight and advice to construction clients on marketplace trends and... Read full bio

Ronald J. Eagar Ronald J. Eagar is the President of Grassi & Co. Certified Public Accountants, PC and is a member of the firm’s Executive Committee. He offers more than three decades of experience in both public and private accounting. Ron’s expertise extends beyond the traditional areas of accounting and taxation and he serves as a comprehensive business advisor to all his clients. He serves as a... Read full bio

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