The Driller
  • Sign In
  • Create Account
  • Sign Out
  • My Account
  • NEWS
  • CLASSIFIEDS
  • EQUIPMENT
  • SAFETY
  • VIDEOS
  • EDUCATION
  • SOURCEBOOK
  • EVENTS
  • SUBMIT
  • ABOUT
  • SIGN UP
cart
facebook twitter linkedin youtube
  • NEWS
  • Water
  • Geothermal
  • Construction
  • Environmental
  • Mining
  • All Industry News
  • EQUIPMENT
  • Rigs & Heavy Equipment
  • Consumables
  • Pumps
  • Featured Products
  • VIDEOS
  • Newscast
  • Drill Talks
  • Ask Brock
  • Emerging Drillers
  • EDUCATION
  • Drilling Business Insights
  • Reference Desk
  • Sponsored Insights
  • EVENTS
  • Conferences & Demo Days
  • Newscast LIVE
  • SUBMIT
  • Drillers @Work
  • ABOUT
  • Contact
  • Advertise
The Driller
search
cart
facebook twitter linkedin youtube
  • Sign In
  • Create Account
  • Sign Out
  • My Account
The Driller
  • NEWS
    • Water
    • Geothermal
    • Construction
    • Environmental
    • Mining
    • All Industry News
  • CLASSIFIEDS
  • EQUIPMENT
    • Rigs & Heavy Equipment
    • Consumables
    • Pumps
    • Featured Products
  • SAFETY
  • VIDEOS
    • Newscast
    • Drill Talks
    • Ask Brock
    • Emerging Drillers
  • EDUCATION
    • Drilling Business Insights
    • Reference Desk
    • Sponsored Insights
  • SOURCEBOOK
  • EVENTS
    • Conferences & Demo Days
    • Newscast LIVE
  • SUBMIT
    • Drillers @Work
  • ABOUT
    • Contact
    • Advertise
  • SIGN UP

Smart Business: The Cash-flow Dilemma

By Jim Olsztynski
June 1, 2009
Contractors are especially vulnerable to cash shortfalls.

Several years ago, I authored a training manual, titled “Essentials of Profitable Wholesale-Distribution,” for the American Supply Association and National Association of Wholesaler-Distributors. Last year, I was asked to update the book, and in doing research in conjunction with the task, I came across some information that startled me. Various business consultants insist that more businesses fail because of cash-flow problems than due to unprofitability. In other words, even if your revenues ultimately surpass your costs, you still can go broke if you don’t collect your money fast enough.

Some businesses are more vulnerable than others to cash-flow problems, and that certainly describes construction trade contracting. Slow pay is part of the construction industry’s culture, and it’s not something most of you have a great deal of control over. While you await progress and retainage payments to materialize, you have payrolls to meet and suppliers to pay, along with fixed overhead needed to keep your business running.

To illustrate the cash-flow dilemma, I’ve constructed a couple of simple charts. Chart A assumes you have won a contract worth $100,000. Material and equipment costs for this job are pegged at $25,000, labor $50,000 and overhead $20,000, leaving you with 5 percent or $5,000 net profit at the end.

Now let’s assume this job has a work schedule entailing three monthly progress payments of $30,000, with the final 10 percent held out as retainage to be paid after everything on the punch list gets cleared up. In Chart B, I have frontloaded material costs somewhat, on the assumption that all materials and equipment going into the work will have been purchased and paid for well in advance of the work being done. I realize this doesn’t necessarily happen in the real world, but in my ideal scenario, you would receive discounts for timely payment, which has been factored into the job’s profitability.

As you can see, even though there’s a decent profit factored into this job, your cash flow runs in negative numbers until the third month, and you don’t get to enjoy all the profits until four months after work began. In the interval, you have to pay your workers and all material bills plus overhead out of retained earnings, or borrow the money from the bank.

Multiply this example by all the jobs you do, and it’s easy to see how at any given point in time you can owe thousands upon thousands of dollars more in payments due than you have cash on hand. You either have to finance the shortfall out of your own pocket, or take out a bank loan to meet your obligations. If you don’t have the money and your credit has run dry, you can be driven out of business, even though, theoretically, you would be able to pay everything once all the money owed to you comes through.

My examples, of course, are oversimplified, but I’ve been around construction contractors enough to know that this example conceptually depicts the kind of cash-flow dilemma that is epidemic throughout the construction industry. Throw in factors such as delayed progress payments and jobs bid under cost, and the situation turns from difficult to disastrous for many contactors.

Another factor that can lead to a cash-flow crunch is rapid growth. People normally don’t think of booming business as having a downside, but when a contracting firm experiences growth on the order of 15 percent or more in a single year, it creates a need for capital expenditures that get frontloaded ahead of revenues. Rapid growth requires more cash for materials, labor and overhead, along with additional tools, equipment, office supplies and equipment, etc. Much of it has to be purchased on the fly without a lot of time available to shop prices or compare value.

And if business is booming for you, it’s probably booming for competitors who are going after the same things, and thus driving up prices through increased demand. Often, you end up having to purchase from unfamiliar suppliers who might not extend friendly credit terms like the business buddies you’ve been dealing with for years.

Here are some ways to stay out of cash-flow hell.

Be choosy about whom you work for. Some GCs and owners are notorious for making life miserable for their subcontractors. Experienced subs won’t even bid on their jobs, so they rely on newcomers who don’t know any better to take the bait. Do your homework before bidding on any job with an owner or GC you don’t know. Also do a little snooping to find out their financial and payment status. It doesn’t matter what you contract documents say about payment terms, if the guy ahead of you doesn’t get paid on time, it’s unlikely he’ll be any quicker to sign your check.

Reduce overhead expenses. This goes without saying as something to be done every day in every way. But when times are good, it’s real easy to pad the front office with a lot of stuff that’s nice to have but nonessential to running your business. It only starts to hurt when business slows down.

Negotiate dating terms. Almost everyone haggles with suppliers over the price of materials, equipment and services, but eventually, you’ll run into the lowest price anyone is willing to offer. That will be the point at which you begin to ask not for a lower price, but an extra 30 days to pay for the goods or services.

Do things right the first time. Mistakes kill profits and cash flow. Nobody will pay you until you fix what’s wrong. When you make a mistake, deal with it right away. Better yet, avoid mistakes.

Send invoices promptly. Most people set aside certain times of month to pay bills, which is sensible. Many contractors do the same thing when it comes to sending out invoices, which is foolish. Get in the habit of sending out your invoices as soon as possible. Oh, and add a late payment penalty, just like a lot of utility companies do. The penalty is likely to be unenforceable, but adds a little bit of a psychological edge.

Stay on top of past-due collections. Call late payers the first day a payment is past due. Keep calling. Send follow-up collection notices, using businesslike but increasingly stern language. Credit and collections professionals recognize that the longer someone owes money, the greater the chance of never getting paid. Debts that are more than 90 days past due generally sell for around 30 cents on the dollar to collection agencies.

Cash that check. When you do get paid, don’t let the check sit around until you “get a chance” to go to the bank. Put it into an interest-bearing account right away. 
ND

Share This Story

Looking for a reprint of this article?
From high-res PDFs to custom plaques, order your copy today!

Recommended Content

JOIN TODAY
to unlock your recommendations.

Already have an account? Sign In

  • geotechnical drilling rig

    6 Onsite Phrases Environmental Drillers Hate

    Here are six phrases that highlight common frustrations...
    Markets
    By: Jeff Garby
  • Wayne Nash

    Pipe Stuck? Common Causes and Solutions for Drillers

    If you have drilled for any length of time, sooner or...
    Markets
    By: Wayne Nash
  • submersible pumps, water well pumps

    Selecting and Sizing Submersible Pump Cable

    This article helps pump installers and servicers decide...
    Opinions
    By: Bob Pelikan
You must login or register in order to post a comment.

Report Abusive Comment

Subscribe For Free!
  • eNewsletters
  • Online Registration
  • Subscription Customer Service
  • Manage My Preferences

The Driller Newscast, Episode 147: Global Geothermal Collaboration at NY-GEO 2025

The Driller Newscast, Episode 147: Global Geothermal Collaboration at NY-GEO 2025

The Driller Newscast: New York Geo Talks 2025 Conference with Hands-on Driller Education

The Driller Newscast: New York Geo Talks 2025 Conference with Hands-on Driller Education

The Driller Newscast: 21st Century Drillers | Part 1 DEMAND

The Driller Newscast: 21st Century Drillers | Part 1 DEMAND

The Driller Newscast: Coiled Tubing Drilling and the Future of Geothermal

The Driller Newscast: Coiled Tubing Drilling and the Future of Geothermal

More Videos

Sponsored Content

Sponsored Content is a special paid section where industry companies provide high quality, objective, non-commercial content around topics of interest to the The Driller audience. All Sponsored Content is supplied by the advertising company and any opinions expressed in this article are those of the author and not necessarily reflect the views of The Driller or its parent company, BNP Media. Interested in participating in our Sponsored Content section? Contact your local rep!

close
  • demo of a DM450 drilling rig during a customer factory visit
    Sponsored byGeoprobe

    Built for You: Smarter Drill Rigs, Stronger Support, Bigger Opportunities

Popular Stories

MainPhotoTwoBrothers.jpg

Two Brothers' Journey Through the Drilling Industry

demo of a DM450 drilling rig during a customer factory visit

Built for You: Smarter Drill Rigs, Stronger Support, Bigger Opportunities

AI and Drought Concerns

AI’s Growing Thirst for Water and Power

The Driller Classifieds

COMPRESSORS

EAST WEST MACHINERY & DRILLING IS BUYING AND SELLING AIR COMPRESSORS, AIR BOOSTERS, AIR ENDS & PARTS
Company: East West Machinery

DRILL RIGS

LOOKING FOR LATE MODEL TOPHEADS & DRILLTECH D25'S
Company: Spikes’s Rig Sales

DRILL RIG PARTS

MEETING DRILLERS NEEDS AROUND THE WORLD
Company: East West Machinery

ELEVATORS

SEMCO INC. PIPE ELEVATORS
Company: Semco Inc.

GROUTERS

GROUTING EQUIPMENT - GROUT PUMPS & GROUT HOSE REELS
Company: Geo-Loop Inc.

PUMP HOISTS

SEMCO INC. - BASIC PUMP HOISTS
Company: Semco Inc.

WELL PACKERS

LANSAS PRODUCTS - INFLATABLE WELL PACKERS
Company: Vanderlans Lansas Products

WELL SCREENS

WELL SCREENS & SLOTTED PIPE
Company: Alloy Screen Works

Products

Water Quality Engineering: Physical / Chemical Treatment Processes

Water Quality Engineering: Physical / Chemical Treatment Processes

By carefully explaining both the underlying theory and the underlying mathematics, this text enables readers to fully grasp the fundamentals of physical and chemical treatment processes for water and wastewater.

See More Products

Subscribe to The Driller Newscast

Related Articles

  • Jeremy Verdusco

    For Drilling Contractors, Cash Flow is King

    See More
  • Smart Business: The Pros & Cons of Going into Business for Yourself — Part 2

    See More
  • Smart Business: Managing by the Open Book

    See More

Related Directories

  • Ascentium Capital

    Ascentium Capital, a division of Regions Bank, specializes in flexible financing solutions for the drilling industry to help you grow your business. We offer customized financing up to $2MM, application only up to $400K, terms up to 72 months and payments to match cash flow. Contact Pat Kistler at 281-348-2018.
×

Dig deeper into the drilling and water supply industry!

Build your knowledge with The Driller, covering the people, equipment and technologies across drilling markets.

SIGN UP NOW
  • RESOURCES
    • Advertise
    • Contact Us
    • Directories
    • Store
    • Want More
    • Classifieds
  • SIGN UP TODAY
    • Create Account
    • eNewsletters
    • Customer Service
    • Manage Preferences
  • SERVICES
    • Marketing Services
    • Reprints
    • Market Research
    • List Rental
    • Survey/Respondent Access
  • STAY CONNECTED
    • LinkedIn
    • Facebook
    • YouTube
    • X (Twitter)
  • PRIVACY
    • PRIVACY POLICY
    • TERMS & CONDITIONS
    • DO NOT SELL MY PERSONAL INFORMATION
    • PRIVACY REQUEST
    • ACCESSIBILITY

Copyright ©2025. All Rights Reserved BNP Media.

Design, CMS, Hosting & Web Development :: ePublishing

The Driller
search
cart
facebook twitter linkedin youtube
  • Sign In
  • Create Account
  • Sign Out
  • My Account
The Driller
  • NEWS
    • Water
    • Geothermal
    • Construction
    • Environmental
    • Mining
    • All Industry News
  • CLASSIFIEDS
  • EQUIPMENT
    • Rigs & Heavy Equipment
    • Consumables
    • Pumps
    • Featured Products
  • SAFETY
  • VIDEOS
    • Newscast
    • Drill Talks
    • Ask Brock
    • Emerging Drillers
  • EDUCATION
    • Drilling Business Insights
    • Reference Desk
    • Sponsored Insights
  • SOURCEBOOK
  • EVENTS
    • Conferences & Demo Days
    • Newscast LIVE
  • SUBMIT
    • Drillers @Work
  • ABOUT
    • Contact
    • Advertise
  • SIGN UP