Relying on traditional spreadsheets and tracking costs after the fact is a poor business practice known in professional project management circles as “management from the rearview mirror.” Making present and future cash flow decisions based on past project history is like closing the proverbial barn door after the horse has run away.
Avoid Managing from the Rearview Mirror
For construction contractors, poor cash flow management, under billing, losing track of project costs, and/or failing to keep up with change orders on a real-time basis is a sure path to lost opportunities for future projects and anticipated business growth. In his article, Determining Your Company’s Bonding Capacity, underwriter Jack Kehl of the Construction Financial Management Association explains:
“A financial report that is 2-3 months old does not allow for a PM to correct problems in a timely manner and shows the underwriter you place little value on this information.”
Kehl also says that a company’s financial reports are the first work product reviewed to assess accounting and cash management competence. Financiers also consider whether a company uses the most up-to-date construction estimating software and if they can efficiently integrate cost tracking from job costing systems for accurate future bidding.
Bankers and bonding agents consider past job performance to determine future bonding capacity, and poor cash flow management on just one job can taint their opinion and is difficult to overcome. The key to a robust financial future for contractors is to look at the WIP report as more than a compliance burden. To do so, many construction accounting firms recommend using the WIP schedule as a precision real-time management tool.
The WIP Schedule: A Strategic Cash Flow Tool
The WIP schedule tracks project data such as contract value, costs incurred to date, total estimated costs, and project billing. AAFCPAs explains in an article on their accounting website that the WIP schedule is a strategic tool that offers a snapshot showing exactly where your profitability stands on a job-by-job basis. This data allows the company to get an overall view of all jobs in progress to make informed management decisions.
The WIP report also throws up red flags in cases of under billing and excessive percentages of incurred costs as a job progresses, providing time to investigate, adjust, and make changes. Running a weekly WIP report can keep a company “ahead of the contract,” increase profitability, and enhance a contractor’s business reputation to expand business opportunities in the future.
For more information about WIP schedules and how Cabbage can help your business, contact us today.