Managing Financials for Your Contracting Business
Today we’ll hear from CPA–Certified Business Exit Consultant Dave Odom. Through his work at his company, Strategic Financial Advisors, LLC, he offers chief financial officer and business transition services to small- and mid-sized business owners. Dave has more than 30 years of expertise in serving companies in finance and accounting, including for a Fortune 100 construction company. For 20 years, he was in the public accounting field, where he did tax return preparation and became familiar with contractors. From there, he sold his CPA firm and purchased an industrial machinery moving company, then transitioned to Windermere Services Company as their CFO. Prior to Strategic Financial Advisors, LLC, Dave was with B2B CFO for a decade, offering his services as a trusted advisor and strategic financial voice to companies small and large that need bite-size chunks of CFO work.
In today’s podcast, Dave is covering three primary topics for those running a contracting business: preparing for your exit, how to have accurate reporting for financial statements and which metrics are worth tracking, and the difference between working capital projects and cash flow. Here’s a high-level look at what you’ll learn:
How to run a successful contracting business: preparing for your exit
It’s critical to plan your exit, whether you’re starting a new business or getting ready to exit from the business you’ve run for a long time. The question now is: Have you built a business that will thrive without you? One of the keys to exiting is the ability for you to become nonessential. You need to have a management team, supervisors, and a crew that can step in and do the work so if you’re gone for a day, a week, a month, or indefinitely, your business will succeed. You want to prepare to sell your business at the highest and best value, and this is one of the ways to ensure you do just that. Other factors that will negatively affect the sale, beyond owners remaining essential to operations, are that the company location isn’t suitable for growth, the market competition, a lack of adequate financial reporting and attention paid to financial metrics, and a failure to adapt to a changing market. The bottom line? Begin with the end in mind.
Financial management for small business owners
It’s harder to fail in a good market because jobs are plentiful and available contractors are few. But if you don’t understand what your profitability is or what your cash flow looks like, you’re operating on luck. If the market turns, competition is tough and margins get leaner. Without an accurate financial reporting system in place, it’ll be extremely difficult to survive the next down cycle. The three primary things that cause contractors to go out of business are errors in estimates, poor job site supervision, and poor visibility to profitability and cash flow. The two approved methods for construction accounting are the completed contract method and the percentage of completion job. If you can take care of those three areas and excel at communicating to the customer, you’ll have a long and rewarding career in construction. Make sure you have accounting tools in place and you know how to use them (or have someone who does).
How to run a small construction company: the difference between working capital projects and cash flow
Working capital is the amount of current assets less the amount of current liabilities. Current refers to those items that convert to cash within a 12-month operating cycle. What converts to cash? Cash converts to cash, accounts receivable converts to cash, inventory converts to cash. Current liabilities include accounts payable, your line of credit, your business taxes, your payroll taxes, and accrued payroll. When you subtract your current liabilities from your current assets, you have working capital. In essence, working capital is the amount of available near-term cash you can use to operate your business. It’s the lifeblood of your company.
We’re excited to have Dave join us on the Dunn Solutions podcast to help you better evaluate the financial health of your business. For more information on attending future educational events, feel free to email me at jimc@dunnlumber.com. If you have questions for Dave, email him at dodom@strategicfinancialadvisorsllc.com.
