1. marcumllp.com CASH FLOW AND THE RELATED BUSINESS IMPACTS marcumllp.com Presented by: Greg Alford, CPA

2. 2 0816004TN Discussion outline  The importance of cash management  The impact of cash management and your financial statements  Review of financial statement ratios  Signs of trouble ahead  How to improve your cash flow  General business considerations  What successful contractors DO  What successful contractors DON’T  Conclusion

3. 3 0816004TN The importance of cash management  Cash flow is the life of the business  The ability to generate and maintain cash levels are key indicators of the health of your business  Adequate cash can allow your business to grow and take on new projects / bid on more jobs  Can you project your cash flow?  Knowing this can determine if you can afford to take on a new job while having enough cash to meet current operating needs

4. 4 0816004TN The importance of cash management (continued)  Can you afford to accept a job you have just been awarded?  Mobilization  Labor, Equipment, Materials  When will you be able to bill and collect the first payment?  Know your customer / prime contractor / contract owner  Understand the terms of the contract  Be aware of the work schedule  Work (cost incurred) drives billing; billing generates cash flow  Be prepared to finance the first 90 days of work on the job  Can you do this and still meet all the current operating needs with current cash reserves and your projected cash flow?

5. 5 0816004TN The importance of cash management (continued)  Cash Flow Projection - the net of projected revenues and the cost of those revenues  Timely and accurate billing  KNOW YOUR COST – can’t stress this enough  You must accurately track and bill for your cost  Cost drives the percentage of completion calculation  How much work will you do each month?  How much of this work can you bill for per the contract  What percentage of billings are held as retainage  What cash is needed to cover payables / costs incurred  Are you paying too quick or too slow?  Take advantage of payment terms  Is sufficient cash on hand to meet upcoming payroll needs?

6. 6 0816004TN The importance of cash management (continued)  Do you understand your financial statements?  Be a business person that works in construction  Use the resources around you and professionals accessible via the DBE program  If you don’t want to understand your financial statements, you may not know if:  Have you correctly paid your taxes (Federal, State, Payroll, Use, Personal Property, etc.)  Are you spending cash that isn’t yours?  Additional work (is there adequate cash flow)  Additional equipment (can you make the payment if financed)

7. 7 0816004TN The importance of cash management (continued)  Are you prepared for an interruption in cash flow - can you still meet your cash needs?  Work is suspended or stopped  Not obtaining proper releases subs / suppliers  Late, untimely, or inaccurate billing  Scheduling is critical  Unexpected job conditions - Consider physical and weather restraints  Are estimated productivity or durations realistic?  One job can start the domino effect

8. 8 0816004TN The impact of cash management and your financial statements  Review of financial statement ratios  Working Capital– Current Assets less Current Liabilities  Current Ratio - Current Assets divided by Current Liabilities – 1.5 or higher  Cash Ratio – (Cash and Invested Funds) divided by Current Liabilities – 0.2 or higher  Debt to Equity – Interest Bearing Debt divided by Total Equity – 0.8 or less  Total Liabilities to Equity – Total Liabilities divided by Total Equity – 3.0 or less  Working Capital Turnover – Total Sales divided by Working Capital – 10.0 or higher

9. 9 0816004TN The impact of cash management and your financial statements (continued) Build’em Big Construction Company Balance Sheet

10. 10 0816004TN The impact of cash management and your financial statements (continued) Key financial statement ratios

11. 11 0816004TN The impact of cash management and your financial statements (continued)  Consistent review of financial information is important as these financial indicators can be predictive signs of trouble ahead  Negative working capital  Low cash balances  High short term borrowings  High AR and underbillings  Use of cash for purchases of long term assets (equipment)

12. 12 0816004TN How to improve cash flow  Billing policies  Accurate & timely – get it right the first time  Collecting AR  Weekly review of AR aging schedules  Managing payables  Take advantage of discounts from vendors, if cash allows  Use of line of credit – if applicable

13. 13 0816004TN How to improve cash flow (continued)  Your employees have an impact:  Estimators  Which jobs to bid on and any related assumptions in their bid  Choice of vendors  Are they getting quotes from multiple vendors and comparing prices?  Project Managers  Scheduling of job activities  Billing  Estimating Costs  Labor and equipment management  Timing of material purchases  Safety

14. 14 0816004TN How to improve cash flow (continued)  Avoiding cash traps  Idle equipment  Unapproved / unbilled change orders  Leads to underbillings  Inventory / excess material purchases  Retainage  Accounts receivable  Manage your payroll  Non-productive family or employees

15. 15 0816004TN General business considerations  Successful contractors DO:  Maintain excess cash  Understand and know their costs  Improves bidding and leads to accurate billing  Manage cost and improve efficiency  Collect AR and timely payment of AP  Accurate internal financial information  Leads to better business decision making

16. 16 0816004TN General business considerations  Successful contractors DO:  Manage their business and personnel  Continuously evaluate current employees and search for the best employees  Embrace technology to improve efficiency  Communicate with the owner and prime contractor  Address any issues immediately  Hire trusted advisors that are experts in their field

17. 17 0816004TN General business considerations  Successful contractors DON’T:  Perform jobs outside of their field / area of expertise  Perform jobs in an unfamiliar region  Buy unnecessary equipment or vehicles  Employ unnecessary people on payroll  Make large withdrawals from their Company and live outside their means

18. 18 0816004TN Conclusion  Understand your numbers / financial statements  Can you afford not to?  Understand the contract: billing and payment terms  Track costs and bill timely  Project your cash flow and avoid cash shortages  The tone at the top says it all

19. 19 0816004TN Questions?

20. 20 0816004TN Contact information  Greg Alford  Email: greg.alford@marcumllp.comgreg.alford@marcumllp.com  Phone: 615-245-4030  Chris Sisk  Email: Christopher.sisk@marcumllp.comChristopher.sisk@marcumllp.com  Phone: 615-245-4065