Opportunity Cost of Poor Project Cash Flow

Are you waiting until the project is done to find out if you made a profit? Do you know if your project cash flows are eating away at your profit? Faster cash is more cash, and you may be missing the opportunity if you aren’t tracking analytics diligently.

Join this webinar to hear John Killingsworth, PhD in Construction Management at Colorado State University, and Bruce Orr, Founder & Chief Data Scientist at ProNovos discuss ways to identify and address profit-draining cash flow bottlenecks.

Find out:

• Why poor cash flow can cost you more
• How to identify common bottlenecks
• The best finance strategies to maximize profit

Transcript

Michael Williams: (03:52)

I’m Michael Williams at Levelset on the manager of financial services, and we have really good webinars today.  , talking about the opportunity costs of poor project cashflow, which anyone in the industry is more than familiar with.  , but I’m really excited because we have,  , two great panelists. We have John Killingsworth, who’s an assistant professor at Colorado state university and he teaches construction finance. He’s a member of the CFMA national benchmark or committee, and works with the committee each year to analyze trends and CFMA benchmark data. Then we have Bruce aura, who’s the founder and chief data scientist of Kronos analytics. And Pronovos specifically focuses on the construction industry and as a leading provider of construction, data analytics, cloud-based data warehousing and all things, business intelligence related. So clearly we have a lot of muscle on,  , on the webinar and I won’t take up any more of their time. So John, Bruce, go ahead and take it away.

Michael Williams: (04:50)

Yeah. Cool. I guess this is back to me.  , so for any of you who are unfamiliar with Levelset,  , we help contractors get paid.  , so when we’re talking about cashflow, a huge component of the cashflow pain in construction is the slow payment that can often often take place in construction. We help you get paid. We help you get paid faster and try and remove the stresses of construction payment.

Bruce Orr: (05:18)

Michael, thank you for that introduction. And,  , thank you for allowing us to be part of this webinar. I’m very excited,  , who is Pronovos. So, you know, for Nobles is a cloud-based data warehouse technology. We only focus on construction data just like Levelset helps you get paid per Nobles helps you analyze the information to show where inefficiencies are,  , to show you,  , you know, how you might be able to,  , sharpen the saw if you will, and work smarter and not harder using,  , intelligent,  ,  , data. So,  , I’m excited to,  , talk about,  , you know, the,  , cost of poor,  , you know, cashflow. So,  , with that, I’ll turn it over to John.

John Killingsworth: (06:12)

 , thanks, Bruce. And,  , and Michael, appreciate you, you letting us come in and talk a little bit,  , about this topic today. This is something that,  , I’m very passionate about in terms of my research and teaching.  , because I feel like this is,  , one of our biggest weaknesses in the industry is managing these cashflows, managing these projects. And, and in my program, I’m I’m training construction managers. So I’m, I’m training the young, young men and women that will go out and,  , become superintendents and project managers and manage projects.  , and,  , and you know, it’s a constant,  , push to get them to focus on the construction financial piece. So,  , so I’m excited to,  , be engaged with, with Levelset and, and,  , and be able to offer some instruction.  , and this I, I provide,  , industry based workshops,  , is something I do sort of on the side,  , because I’m, I’m, I’m really engaged in this.

Speaker 4: (07:26)

So I do training programs,  , with industry on fundamentals of construction finance, and,  , project level cashflow management. So what we’re discussing here is, is like a, you know, a 30, 40 minute s mary of just that project,  , level cashflow,  , training. And so it’s really just,  , almost if you will a teaser, but we, we really do want to emphasize some of the main principles,  ,  , that are in that program. And, and I’ve been working with Bruce for a n ber of years. And,  , and you know, when we got introduced, I started,  , getting more into analytics and using analytics in that, in that training.  , and so Bruce has been instr ental and really helping me sort of advance,  , the, the ability to, to, to manage cash flows and to show and train,  , project managers, how to do that more efficiently.

Speaker 3: (08:33)

So, so John, I have a question for you before we get into this.  , I, as you said, we’ve been working together for a n ber of years and,  , this particular,  , webinar, will this be,  , you speaking to us as a professor, so is going to be highly academic, or are you going to show, you know, the real,  , business application of, of, of cash job level cash flow?

Speaker 4: (09:03)

Yeah.  , so,  , nobody ever accused me of using big words.  , so,  , so yeah, so I’m really,  , trying to,  , make this very,  , practical,  , notice I use the word practical instead of pragmatic. Right. So,  , yeah, so trying to,  ,  , make this usable information, right. So very practical information.  , so,  , hopefully it’s not too academic.  ,  , even my research is very grounded.  , if you will, in terms of applicability to industries from, I’m very cognizant of that. So hopefully,  , it’s, it’s doesn’t sound or come across academic, but,  , but some of the language just right in analytics and, and, and so forth just naturally,  , is, is a bit academic. So,  , please, if anybody’s got questions we want to, we want to hear what your questions are and, and, and the challenges that you’re facing,  , of,  , implementing,  , the things that we’re sharing today.

Speaker 3: (10:17)

Yeah.

Speaker 1: (10:19)

And j p in and,  , and mentioned, I forgot to tell the, encourage the audience to ask questions. I’ll be monitoring both the Q and a section,  , and the chat. So at the bottom of your screen, you can click Q and a or chat and ask questions at any time.

Speaker 4: (10:36)

Perfect. Thank you, Mike. Appreciate that. Okay. So fundamentally, right. Let’s, let’s think about,  , cash flow from the very sort of basic contractual level. And you can see on the,  , on the top far left, right. Working left to, right. If you look at this sort of in terms of a Gantt chart, I suppose.  , and so we do work right. And so maybe that period represents,  , a month,  , of, of work. We get to the end of that month and we invoice the owner, right. And contractually, then the owner’s given a 30 day period,  , to make the payment. And then that payments received,  , after that, meanwhile, we’re still continuing to do work, right. So if everything follows contractually to the way it should be we’re 60 days or so,  , 60, 65 days in, from the time we start work to the time we receive our very first payment, right.

Speaker 4: (11:52)

And then that is constant. We understand and construction that’s, that’s part of right. The, the cost of doing business. I hear that quite a bit,  , to TAF to carry that. And it is, and,  , you know, general contractors have quite,  , quite an expense carrying,  , carrying that load. And some of that gets passed to a lot of it gets passed down to the subcontractor base as well. So we all are very familiar with,  , how things go that construction cashflow cycle throughout the project. Right. And we’re closing out a project and we’re still waiting for money, even though we’ve, we’ve completed our scope.

Speaker 5: (12:40)

And so, John, I just wanted to ask is this is the way it should be. And am I right? This is what we’re used to, when things are clicking, you do the work 30 days, you bill, you get paid, you know, and, and this is the way it should be,

Speaker 4: (12:55)

Right? Yeah. Contractually, this is what we expect,  , right. How it, it should, should go. Okay. But what’s the reality, right? The reality is we do the work and then,  , you know, our project manager,  , delays, sending off the invoice and, and now, right, the 30 day clock is, is ticking and we’re, you know, a week or two or whatever into that next cycle, before the invoice,  , even goes out.  , and, and then if our owner,  , customer is paying in that 30 day cycle, we still now have extended, right. That casts flow cycle,  , for receiving the payment because of our own sort of inconsistency in invoicing or delay in invoicing. So that’s a critical thing.  , if anything, right, take away, let’s make sure that our invoicing is happening on time.  , and then the next scenario, right, Bruce is, is we invoice on time, but the owner pays more like 45, 50 days. And when I look at the industry average, in terms of days of,  ,  ,  , days in accounts receivable, it’s actually upwards of 50 days for the industry average.  , and then it gets worse for the, for the,  , subcontractor base, because there’s always that lag, right. There’s the pay when pay lag as well. So,  , subcontractors are carrying,  , that burden for a longer period of time.

Speaker 5: (14:52)

So the, you know, what the average is because of the work you do on the CFMA , marker. Is that where you’re getting that information,

Speaker 4: (15:06)

Right? That’s exactly right. So I’m, I serve on the,  , on the national,  , CFMA benchmarker committee. So,  , so I’m able to see sort of the raw data when it comes in.  , and, and so I do analysis on that. So in the last few years, we’ve gotten some great response on that and, and I’d love to see it continue to get bigger.  , but yeah, last year we had like,  , close to 1500,  , contractors participate that. And so it really gives us some meaningful data. And this is the trend that I’m seeing in terms of the accounts receivable. What was

Speaker 5: (15:45)

The average again,

Speaker 4: (15:48)

 , for this ratio? Yeah. Yeah. It’s, it’s upwards of 50 days,  , a little bit longer for,  , subcontractors, a little bit shorter for CMS, right. About the average for GCs.

Speaker 5: (16:05)

Okay. Okay. Where it, we believe that based on the previous slide 30 days is what typically you’re contractually,  , you’re at

Speaker 4: (16:16)

Right 30 days, right. We, we expect that in our, right, in our model and our estimating and so on and so forth in our fee structure, we expect 30 days. Got it. But the reality is, is we’re closer to 55 days. Got it, got it. So, right. So, and then imagine,  , that aggregate, if we had delay in payment and the owner is, is taking too long to actually pay now, we’re, we’re aggravating that pay cycle even more so, so Lissa switch over to, to,  , the pro novels. Got it. Right. Okay. So, so here’s a project that,  , Bruce helped me pull into Pronovos right. And I was cashflowing this project for, for a client and trying to do some analysis for them. And initially, like outside of the pro novels,  ,  , app, you know, I was working in Excel. It’s very sort of time cons ing and reality.

Speaker 4: (17:26)

Like, do you look at this spreadsheet? And you see right. All of these n bers and until you actually start to analyze them and so forth,  , you know, what does it tell you? It’s just, it’s just this massive spreadsheet of n bers. And even when you do start to calculate some sort of basic descriptive statistics or whatever, so some details, it’s still just n bers, n bers, n bers.  , so, so the challenge in this case right, is, is seeing really what’s happening. And so,  , this is, this is the powerful thing. This is what gets me really excited about,  , you know, visual analytics and,  , and so,  , not to inflate your ego too much here, Bruce, but I mean, I love what you’re doing because it helps us, right. Operations, see things very quickly and see the data in a quick way so that we can see trends and, and be able to make managerial decisions,  , based on those trends.

Speaker 6: (18:38)

Yeah.

Speaker 4: (18:41)

Yeah. Let’s take a look at,  , this same data graphically, right? So here’s the project, how it,  , how it,  ,  , you know, proceeded over time and you can see, we have a,  , an August, 2019, the, these dates have been,  , altered sort of to sort of protect the, the D to be able to make it public.  , the contractor asked me to,  , you know, to change some dates and that kind of thing, but really the, the, the dollar figures are,  , exactly accurate to, to the way they were. So we have this project that started in August if,  , 2019 and proceeded through,  , we’ll pretend that may of 20, 22 is in the past and you can see the red line is indicative of my job costs.  , so right. So we get that monthly job cost report and,  , and you can see, right. It follows that standard sort of S curve,  , a little bit slow in the beginning and then escalates, and then,  , slows down at the end. And that’s, that’s a typical trend,  , in any, any,  , construction project.

Speaker 6: (20:07)

Just let me ask a question real quick about the S curve, when you have an S curve that you’re looking at regarding job costs. In my mind, I would imagine that you should see a similar curve around invoicing, or do I have that wrong?

Speaker 4: (20:27)

Yup. Right. It could, because you do want it to track, right. You want to keep pace with your job costs and ensure that you are invoicing.  , and in fact, one of the things that I hear quite a bit from,  , the accounting department of, of a lot contractors, is there frustration that their project managers,  , yeah, they might be good at invoicing regularly, but they consistently forget to include the fee and, and, you know, and so therefore,  , the,  , the,  ,  , really, so the invoicing is always lagging. Right.  , and so,  , and so w you know, I tend to really emphasize,  , ensuring that you view things like, you know, overhead and profit as sort of an obligation, or, you know, if a project manager can see that as an expense sort of obligation to their own company, and they treat it as such,  , then they’re sort of more apt to ensure that they’re, that they’re including that in the voice invoice and non neglecting it, but in this case.

Speaker 4: (21:45)

Right. So, so the black line is in fact, the,  , job to date,  , invoice amount. And what we, what we like to see is right, that, that, that black line is outpacing the red line just a little bit, and yeah. And right where your cursor is, that’s a perfect example of how we want it to, to,  , mirror, right. If we’ve got job costs, and then you add the fee to that,  , that’s how, that’s how we want it to go. Right. So that’s the invoicing. It, it is tracking very well, but what happens when we don’t invoice for a month, right?  , we’ve, we’ve flat line, right, right there. And, and that’s a concern. So every single one of those flat lines, right. Where your cursor is, which is, you know, September 20, 20, and then up,  , up a bit, we see that again in,  , February, March 20, 21,  , we flat line again.

Speaker 4: (22:53)

And any time that that red line is above the black line is an indication that the contractor is caring, is going to be carrying,  , right costs and causing additional expense in terms of carrying the cashflow for that project. So let’s take a look, let’s see what happens then with the payment cycle, we add this, this is green line. Now what we see is,  , the green line represents the payments receivables. And so, and what’s interesting too, right, is this owner,  , for the most part was just basically following the pattern of invoicing. We could see that August,  , August, September invoice that did not go out and subsequently there wasn’t a payment, of course.  , then up above that, just a little bit in December, November and December, right. We see a flat line with the owner. And so that’s a delay from the owner in pain, and you just see that disparity or sort of that horizontal gap, if you will, when that horizontal gap gets larger, then that’s going to create a financial burden on the contractor.

Speaker 4: (24:27)

So, all right. Real quick recap, when the black line, flatlines, that’s an indication that your project managers are not consistently,  , invoicing when the green line widens, that’s an indication,  , widens the gap between the black and the green line. That’s an indication that your owner is actually delaying payments. Keep in mind too, that we are naturally going to see a little bit of widening because of,  ,  ,  , because of retainage. Right.  , and,  , so if, if at the beginning we won’t see as much disparity, but as the project continues on, we’ll see that 10% retainage or 5%, whatever it is, it’s going to widen that gap a little bit anyway.

Speaker 3: (25:21)

So let me, let me try to put this into a practical,  ,  , since,  , just because I, I like to think, and,  , you know, things that, that might impact me,  , if, if, if I have a wide gap here between the,  , the black line and the green line, that means that someone is carrying that cost and that someone typically is the,  , the construction company, like my company right there, they’re the ones, they are the bank on this job. Is that right? Is that what you’re saying?

Speaker 4: (26:01)

Yup. That’s, that’s exactly right. And,  , you know, some of that of course trickles down to the, the subcontractors because of our pay when paid clause, but really,  , you know, what happens frequently because general contractors value that relationship with their subcontractors and understand that a lot of these subs are very small businesses and just don’t have the capacity to flow. They, they tend to pay,  , like go ahead and pay them within the, within 30 days with even if they haven’t been paid. And I know a lot of, a lot of general

Speaker 7: (26:44)

Contractors do that, you know, maybe they have a benchmark. If the, if the contract is, is, you know, $50,000 or less, or something like that, then, then they go ahead and pay those small contractors because they just don’t have the resources,  ,  , to, to cashflow. And they’ve got to keep their, you know, they want to keep their people onsite. So, yeah.

Speaker 3: (27:07)

So, so what is, what is,  ,  , some best practices around, around, you know, ensuring that something like this does not happen. Yeah.

Speaker 7: (27:17)

 , so there’s, there’s three things that I like to sort of,  , emphasize, and that’s the consistency,  , the timeliness and communication. So first be consistent in,  , in your invoicing,  , make sure that there is an invoice sent every single month be consistent on that.  , regardless of how small the project manager thinks, right. That that invoice is in relation to the project, right? So for instance, this project, which is $44 million,  , so you know, fairly significant project. And so it’s easy for a project manager to see, you know, $150,000 invoice as, you know, barely insignificant. And I don’t want to go through all that paperwork for, you know, an invoice that represents, you know, less than 1% of the project and, and,  , you know, why go through the rigors? Well, it’s more than just that $150,000, and we’ll show you in a little bit,  , sort of the impact there, but consistency is very critical and we can see that,  , when we’re inconsistent, then the owners become inconsistent.

Speaker 7: (28:44)

So even, even us thinking, Oh, well, it’s all a, it’s a small invoice compared to the contract size. We’ll just wait until next month. Well, what happens in the mind of the owner is they start to think, Oh, well,  , he didn’t invoice.  , and so, you know, so really, you know, that cashflow isn’t, isn’t critical.  , and so they start getting that sort of wrong message or wrong interpretation of a message. The other thing is timeliness, and this part is critical as well because ultimately we’re h an and,  , we get into habits and we get into, you know,  , cycles the owners when they receive an invoice, if it’s timely and coming in at the same time, every single month, then they actually develop

Speaker 4: (29:42)

Habits and behaviors to respond to that. But when the, when it comes in at different times of the month and our timeliness is sort of is, is off, then,  , then that throws off the pattern for the owner. So that, so really what we’re trying to do is train the owners to be timely and consistent as well. And that’s critical. And then of course communication,  , right. I, I w we can’t talk enough about that topic, but,  , follow up, did you receive my invoice? Do you have any questions? Doesn’t meet the standards. When are you coming to the job site? I want to make sure that I’m here for you, you know,  , communicate and be again, consistent and timely on that communication as well. Yeah. A lot of contractors don’t think that they, that they can have that conversation. They need to have those conversations with the owners.

Speaker 3: (30:47)

You know, that, that’s interesting. What you just mentioned. I have two things that I like to add to that I have typically seen the S curve plenty of times, as it relates to cost, never have, are considered what an erratic,  , line looks like for, for billings when you don’t have that smooth curve like you do with the red line. You know what, when it’s everywhere, that is based on what I am hearing. That’s typically,  , not consistent behavior on the part of the project manager. And I think that’s what you’re saying.  , but so it’s interesting.  , if you’re a project manager,  , these are some of the things that you probably should already be aware of. You should know, you have to build every month. You should know that the timeliness is important.  , and I know things go wrong on a project and you might miss a billing, or like you say, you might feel as though the billing is, you know, insignificant. So if you find yourself missing a billing, I’m curious what the fallout might look like. How, how does that impact you from a, from a dollar perspective?

Speaker 4: (32:07)

Yeah, it’s pretty significant. So actually,  , what we did here is we calculated the,  , the cost burden when that happens. So, so here’s a histogram that is superimposed with that same asker. And so across the X axis here, any time we see,  , the, the value is below that X axis, that is the dollar amount,  , that

Speaker 7: (32:40)

Costs us in terms of finance charges on our line of credit. So let’s say our credit or a line of credit is, I don’t know, four or 5%, whatever.  , and, and again, we anticipate carrying some costs on our line of credit,  , to, to carry the project. So, so none of this should come as a surprise to anybody, but what is surprising is how significant, how much it grows when there is that inconsistency or lack of timeliness in the invoicing. So, so right where you’ve got your curse or Bruce is a perfect example, right? And, and, and $7.7 million,  , was our negative cashflow. So that’s the dollar amount that we are carrying on this project at that point in time and notice, right. How fast it escalated from just two months prior. Yeah, yeah. Right there. Perfect. Right. It went from, it went from really two, two and a half million dollars to 7 million really quick and a 7.7. So almost $8 million. We’re carrying on that, on that line of credit, that gets pretty expensive. And all of that is rooted in just simply,  , not, not invoicing one month.

Speaker 6: (34:09)

That’s incredible. You’re telling me this flat line resulted in what we’re seeing here for the month of October, that 7.7 negative 7.7.

Speaker 7: (34:20)

Right. Wow. Yeah. So remember, that’s the, that’s the job costs, right. That we’re carrying. So now let’s take a look, let’s take a look at that.  , just that histogram on his own. Right. So, so here it is. But now what I’ve done is I’ve calculated the,  , finance charges associated with, with caring, right. That those costs. So in that month where we were $7.7 million at a 5% APR, we’re going to carry $32,000 in finance charges alone. Right. So that’s 5% divided by 12 times balance,  , that we’re carrying for those 30 days. Now that’s a lot of money, I mean, right. And, and you can see, so every single one of these months here,  , we’re, we’re seeing a carrying cost,  , and it’s directly correlated.  , every time we see that spike, it’s, that’s an associated cost with

Speaker 4: (35:38)

A delay in invoicing or delay in receivables.

Speaker 3: (35:42)

This is, these are salaries that we’re looking at, right. That you’re paying for these,

Speaker 4: (35:48)

Right. That’s a monthly, that’s, that’s a monthly,  , cost. Right. So, yeah, yeah. That biggest dip, $32,000 in a single month,  , you know, 24,000 in a single month. And,  , and,  , honestly, I, I would, I would quit my job as a professor and come work for anybody that would pay me that much to them

Speaker 3: (36:12)

Casual.

Speaker 4: (36:16)

Right. But that’s a lot of money. So, so what does that look like over the course of a project? Well, let’s look at a c in c ulatively, right. And you can see, right. There’s that big j p. And we look at it over this,  , you know, three-year project was a long project.  , but over the course of that entire project in our last month, when we finally closed it out, when we looked at the c ulative,  ,  , expense, again, this is just, this is just the interest alone on carrying that project $336,000 on the, on this,  , $44 million project now. Okay. That’s a huge n ber. Let’s look at that in terms of right. The comparing that to our fee structure.  , and this is what happens right? When we, when we’re proceeding through a project, and this is the danger, this graph right here that you see is basically the erosion, the margin erosion throughout the project top left, we see that’s the contract value 44 million.

Speaker 4: (37:37)

And the fee was estimated at, at 2.08 million, almost $2.1 million, 4.7% for the fee. And then, and then remember, right, are our total costs on that line of credit was 330, $6,000. This is how margin erosion works. It’s very gentle, slow, right? It’s very subtle. And it happens slowly over the length of the project. And what happens is we, we, our project managers tend to not focus in on that and they get to the end of the project right. And realize, wow, our margins were bad, or our fee eroded down to 1.75.  , right. And so that’s significantly, significantly lower than what we estimated that at 2.1 million that you know,

Speaker 3: (38:37)

That that’s PR that’s pretty amazing. I love how you, how you put it,  , you know, is, is something that is subtle and it starts with maybe, Hey, this invoice is insignificant. Let’s wait. And we flat line out, not knowing that long term, we’re creating this habit. Not only, it sounds like what you’re saying. It’s not only the habit of,  , us,  , relaxing,  , the billing aspect, but we’re also,  , training the owner as well,  , around how we operate.  , so, so this is really interesting. I just have one question because, you know, it seems like as, as a project manager,  , I have a lot of responsibility, but one of my key responsibility typically is let’s make sure that our costs don’t get out of hand and exceed our budget. So,  , you know, if I build late and the company has to bear the cost of carrying that burden,  , you know, how, how would I know what that true cost is? I’m a PM. I’m not, you know, I’m not the financial person that’s looking at all of this. So,  , you know, is there a way that APM might understand what that, what that burden is?

Speaker 4: (39:58)

Yep. We, we won, we got to get them trained. We need to help them understand,  , you know, what is really happening behind the scenes and scenes in terms of financing this project. So a lot of them are just simply naive. They just really aren’t aware this is happening.  , and, and then if we’re using our line of credit,  , right, what does that really cost? And so,  , and then the other thing too, is I hear this a lot. Well, we’re just using our cash. We don’t use a line of credit. We don’t use debt to finance project. We use our cash. And, and that gets me a little bit sick to my stomach, to be honest with you, because when a company’s using their cash, that means they don’t understand opportunity costs and opportunity costs is much more expensive than a line of credit. Because if you look at your return on assets, right, your return on assets is probably closer to 10, 12, and some companies that are doing really well, right? Their return on assets can be like 15%. Well, I would much rather use my line of credit at 5% than my cash that costs me, you know, 12, 15%. That’s a significantly higher because now what I’m doing is I’m using the cash that should be used to grow my business, to expand into new markets, right. To develop,  , into, into,  , you know, a

Speaker 7: (41:34)

More capable business. The other thing too, that’s happening there is this balance for, for securing bonds, because if we depreciate or if we,  , reduce our liquidity, we’re actually damaging our bonding capacity higher than by using that line of credit.  , so,  , you know, if we have higher levels of liquidity and maintain that our Bonnie capacity is going to is gonna grow faster than it’s, it would be diminished by using or leveraging inexpensive debt. So,  , so I, I, I cringe a little bit when I hear companies talk about using,  , their cash instead of a line of credit. It’s,  , it’s inexpensive at this point, use that. So,  , but getting back kind of to your question there,  , you know, how do we help them? We train them, we, we need to make sure that, you know, we have some kind of instr ent in place to measure and,  , you know, so,  , so I’m advocating obviously,  ,  , an instr ent like Pronovos where you can quickly educate and quickly track,  , your, your movements there for cash flow and be able to,  , right.

Speaker 7: (43:01)

To inform your project managers, Hey, this is the trend you’re going on. This is what’s happening here. This is what’s costing us,  , for these negative cash flows and get them back on track, right? It’s, it’s,  , it’s a, it’s a teaching opportunity. It’s a training thing. And we’ve got to continue to,  , to talk about that and, and so forth that that greasy wheel gets the great, or the squeaky wheel gets the grease, right? If we’re talking about cash flows and, and, and talking about these principles, that’s, what’s a right. That’s, what’s going to get the attention.

Speaker 3: (43:39)

And, you know, I have to say, you know, this is why we do what we do.  , as it relates to just analytics, construction data, there’s so much hidden value in this data. When you have the tools to,  , see stuff like this, you can make change and you can change the trajectory of negative outcomes. And while this is what we do, you know, analytics, I think that,  , you know, if you are not working with a tool, you should,  , I mean, something like this literally means that you can, you know,  , save thousands of dollars within your organization.

Speaker 7: (44:22)

So thousands of dollars,

Speaker 3: (44:25)

Tens of thousands of dollars. Exactly, exactly. And, and just still speaking the accounts receivable, speaking about billings, you know, everyone, I would imagine that a lot of project managers are working with their accounting department to understand what their,  , aging, their AR aging looks like. And so I’ve had a great opportunity to work with different contractors to try to understand what type of information they’re looking at. And so, you know, when you put something like this in the hands of,  , the project manager or the,  , someone in accounting to try to understand, you know, what is, how are we managing our receivables? How can we, you know, not be the bank that, you know, for as long as we have to be,  , something like this will help you drill into those invoices. John mentioned the day sales outstanding. How are you performing month to month?  , you know, and how are you aligning to the,  , industry average? You know, and, and I think something like this is crucial.  , everyone needs the right tools to,  ,  , you know, increase the bar, right. We always want to get better. And I think that is the message that we have around analytics and the opportunity costs and, you know, with a company like, Levelset, they help you get paid all of this ties together.

Speaker 7: (45:58)

Yup, yup. Yeah. We’ve got to get the right tools,  , and,  , get that into the hands of users. We’ve got to do some,  , training.  , yeah, so real quick,  , a lot of people will ask,  , Bruce and I get this question a lot. How do I get started? Where do I get started? So,  , so this is just kind of a recap here. First assess your current practice. What are your, are your project managers currently doing in order to do,  ,  , manage the cash flows? What tools are they using? So assess where you’re at and are you using a company cash or lines of credit. So figure that out, find out where you’re at and then calculate your cast flows, get, you know, get a, get a tool, start getting it figured out,  ,  , ex you can do it in Excel, but I guarantee you, you’re going to spend a lot more time in Excel.

Speaker 7: (47:01)

 ,  , whatever tool you use, just get it in there and figure out what that,  , negative cash flow is costing you. And then stablish some kind of standard and, and, and create a managerial strategy when to use cash when to use your line of credit. Right. And talk about,  , that with right, the, the necessary decision and,  , and then make sure your project managers are using and reporting that tool that you, that, that you use, right. And that you creating some consistency.  , what I have found is the companies that are consistently and timely sitting down with their project managers to hold them accountable, they begin to follow that same pattern. So it, it starts with you, it starts with,  , you know, the people that are going to be managing and leading,  , your project management, and then finally, right. Sort of the end of that cycle, use that report to measure your progress, provide your feedback to your team, and then start that iterative process over again and continue to refine it and, and,  , then use that to, to improve. So,  , I have found that contractors that began this process right, see significant changes in their behavior of their project managers.  , and then they’re able to actually incentivize,  , you know, financially for their project managers, the idea of,  , managing cash flows in a, in an improved manner. So, yeah, well, we’re, we’re almost out of time. We got about 10 or 11 minutes. I’d love to hear if we’ve got any questions, Michael, or from the money.

Speaker 1: (49:06)

It looks like it looks like we don’t have any,  , any posted questions as of now. So let’s give the audience a minute or two to see if they have any questions.  , but guys, this was, this was fascinating. It’s great to see that visualization of,  , in, in real time. So it was super valuable to me, but let’s give it a, let’s give a few minutes to see if anyone has any questions and,  , while we’re waiting on those, the, I just want to tell the audience that the webinar is recorded. It’ll be up on Levelset YouTube channel, and we should be sending you guys a copy of the presentation as well.  , and here’s our email addresses, if you have any additional questions,  , after, after we end the presentation.

Speaker 7: (49:54)

Yeah, absolutely.  , Michael,  , I, I would love to continue to learn more about too, about what you’re doing to help contractors,  , to get paid on time and so forth and, and,  , and move that forward because,  , that is that that’s a significant issue in our industry, right? Is, is that, that receivables and,  , cash flow is the n ber one reason for contractor failure. I mean, we saw that in the last recession coming out of the recession, we were into the recovery period and we still saw significant,  , financial failures. And,  , most of it was, is really due to cashflow. Not, not, you know, it’s not due to,  , in competence and everything. I mean, most contractors are just solid they’re in the business. Cause they know the business, they know how to make the money. We struggle with just collecting the money.

Speaker 1: (50:59)

Yeah. You know, one thing that really stood out to me and, and your, when you were talking about the opportunity cost of using, you know, financing, your projects off of your own balance sheet is when you use the example of how detrimental that can be for bonding purposes.  , you know, because it’s, you know, you hear the common thread of poor cashflow in construction. Well, don’t, don’t take out debt, don’t use lines of credit. Don’t do these things because you don’t want to further yourself into a cashflow crunch, but to your point, there’s, there’s definitely a balance because you need to be stable enough, essentially have a rainy day fund, or even just have funds on your balance sheet available to get future future financing or weather a storm. If there is an extended period of time, if you’re using all your cash on hand, it’s going to be very difficult to then get financing the future to get out of cashflow crunches.

Speaker 1: (51:57)

And so it’s somewhat of a chicken and the egg,  , process that I see often where,  , someone really needs financing, but it’s very difficult to get financing because they have no cash on hand. So any traditional lender or banker is going to look and say, well, there’s not enough strength on the balance sheet to be able to provide that financing, furthering the stresses and pain. So I thought that was a really interesting point that you made,  , kind of debunking the myth of all debt or all, all credit extended is bad because that’s just not the case. And in a way, it makes you,  , more financially sound by taking on debt, which is somewhat counterintuitive to a lot of people in the industry.

Speaker 7: (52:37)

It is, I mean, we, and we just naturally, even in our personal lives, right, we were very concerned about that, but, but in business we leveraged debt. Right. And,  ,  , we do that with our equipment,  , right. We purchase equipment for the, for the sole purpose because that equipment generates revenue well. So why would you deplete your equipment,  , right. Which is essentially going to deplete your ability to generate revenue. Well, look at your other assets in the same light, don’t depreciate those assets,  , or deplete those assets because now you’re depleting your ability to generate more revenue and contractors are more efficient at generating revenue with their assets, right. Then, then the expense of short-term debt. Yeah. And, you know, and, and I talked about,  ,  , that strategy and that cycle there, that strategy,  , making there include your sureties in that decision-making process, bring them in and say, okay, we’ve just, we’ve just landed,  , this nice, you know, big project.

Speaker 7: (53:57)

 , and, and here’s where our,  , here’s where our financial statements are. You have them,  , we’re, we’re considering trying to strike a balance between how much cash we use and how much short-term debt we take on,  , or use that line of credit and go, Hey, get their feedback.  , you know, some shorties are, are more risk averse in terms of debt. And some sureties are more risk averse in terms of your equity structure. So,  , you know, so why not have that conversation? Why not include them? And the reality is I guarantee you, that’s going to gain good faith with those, with those sororities. They’re probably more willing to take on risk if, if they’re included in that strategy and that decision.

Speaker 1: (54:49)

Yeah. Yeah. That’s a, that kinda ties into something that,  , you know, we, we recommend to all of our partners and we work with a lot of smaller, a lot of smaller contractors, subcontractors, who aren’t even in the world of speaking with charities, they may be doing residential to owner projects.  , but a big piece of that is just transparency and showing yourself and making sure that you’re transparent with all the stakeholders on a project. That’s something that’s very important in our process.  , what are some, what are some tips to that you can maybe provide to someone that’s just getting started,  , in the industry or a smaller subcontractor that may not be at the point of looking at,  , the opportunity costs of, of using balance sheet funds or,  , or, you know, taking out lines of credit. But I want to know what similar principles apply to a smaller subcontractor, a smaller contractor, someone that’s just getting started in the business.

Speaker 7: (55:50)

Yeah, that is an excellent question. And, and,  , typically what I suggest is that smaller contractors should incentivize quick payments. We, we have our material suppliers do it all the time. Right. We get that invoice and it says up on the top, right. It says, you know, a 2% discount and, you know, if paid within 10 days, net is due 30, right.  , why not early payments for your general contractors, if, if you’re carrying,  , your line of credit at, at 5%, just to cashflow your own, you know, small business needs,  , why not, why not give the general contractor a point or two back on there, on, on that invoice, a discount on their invoice if they pay you within 10, 15 days instead of a paid pay when paid,  , and right. So you come out ahead because you’re not carrying that debt and they come out ahead because right. They get a discount. And honestly, you know, no, I mean, if a contractor understands what that, what the value of that discount is, they’ll take it every day, that week. Right.  , so that’s one strategy is incentivize early payment.

Speaker 1: (57:26)

And we have a question. We have a question from John,  , is,  , is there, is there a particular subcontractor trade that’s most vulnerable to poor cashflow?  , and I may, I may take this, I have a guess, but John, I’d be interested to hear your feedback as well. What I see a lot in working with,  , working with subcontractors is those that have very high upfront material and labor costs early in the job typically can face cashflow crunches.  , let’s say if it’s, if it’s cement work or roofing work or, or even in, I’ve seen in, in solar where you have these huge upfront material and equipment and labor costs, and often those get dragged out for a long period of time, which, you know, in those cases, it does make sense to take advantage of some different financing options for that,  , for the supplies. But I’d be interested to hear your take

Speaker 7: (58:21)

Well, I agree with you, anybody that’s carrying heavy material costs upfront, you know, structural steel erectors,  , you know, the,  , the reality is, is the reason why structural steel directors get paid so well and their margins are so good is because they’re, they’re taking on a high level of risk. And if you think about,  , them performing, you know, 15 to 25% of the full scope of the work, right.  , and it’s early on in the project, do you think about that S curve? And you think about the impact of, of,  , pay when paid and,  , retainage costs, the structural steel guys in those concrete guys are, are,  , investing quite a bit of money upfront, and then they have to wait for the full completion of the project before they basically get their, their profits. Well, they’re going to build in a lot more risk management right there.

Speaker 7: (59:28)

They’re going to build a lot more of that sort of,  , contingency into their own bids as a result because they have to right offset,  , the risk associated with slow payments retain it’s a pay when paid that kind of thing. So,  , so it’s not just small contractors that are vulnerable. It’s, it’s big contractors are as well.  , I, I, you know, the,  , interestingly enough, just two, two and a half years ago, the second largest construction firm in the UK folded up and it’s because they, they just didn’t have the sufficient cashflow. I mean, they were massive, they were bigger than Kiewit. And,  , and yet they, they had to fold fold-up and, and,  , the government came in and intervened and, and,  , it was poor, poor cash flow.  , but well that doesn’t make it easier for small businesses that, right. And when we depend on small businesses, so,  , we need to shore them up as best we can. I mean,  ,  , so it’s, it is a relationship that has to be strong, so communicate well, be consistent, be timely.

Speaker 1: (01:00:48)

I love it. Yeah. Well, John, Bruce, this is great. I really appreciate the time.  , again, if anyone has any up questions, you can email, email us directly and,  , hope everyone has a great rest of the day. And thanks again.

Speaker 7: (01:01:05)

Thanks for inviting us. This was great.