Okay ... I know what you might be thinking. 

'Who cares about cash flow statements? My accounting team sends me monthly recaps of our income and expenses, what else is there to know?'

Or maybe if you're like some owners we see, you know the importance of tracking cash flow but are confused by the different financial statements involved in the process. 

In Episode 2 of our Hot Takes Podcast, our finance wiz Greg Gorman sits down to discuss how important it is for construction companies to properly track their cash flow. What's the difference between a cash flow statement & a cash flow document? How do I forecast future income & expenses? What could go wrong if I'm not doing this correctly? 

Greg answers all these questions & more! Enjoy the episode and please like, subscribe, & share your thoughts in the comment section below!

Don't have time to listen right now? Download & listen on the go!   

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Podcast Transcript:

Jack Austin:

So, Greg, I know a lot of the time you're dealing with projects relating to company's financial and accounting procedures, right? so looking over some of your recent projects, past ones, are still currently ongoing. Do you feel there are any common trends which stand out that you kind of want to address and discuss here today, or are there any common problems you're seeing across those different companies that you feel like kind of keep jumping out at you?

Greg Gorman:

I think the thing, I've talked about this before, I think I even wrote a blog about this … about how important financial reporting is. WIP's and, you know, your financial statements. I think the thing that I want to. That we should probably do a series on almost is cash flow. The difference between cash flow and the statement of cash flows. I'll explain what that means.

So there's three financial statements that every business uses, construction or not, a profit and loss statement, a balance sheet, and what's called the statement of cash flows, or cash flow statement. And a cash flow statement is not the same thing as a cash flow document. And cash flow is what construction companies have to have in order to know how much money they actually have. So think about it. You're a little young for this. But do you even know what, what, what it used to mean to balance a checkbook?

Jack Austin:

Right … I haven't done it personally. I know the concept.

Greg Gorman:

Okay, so back in the day, when you, when you balance the checkbook, you literally had this little book, right? And it had like a ledger document. You wrote it out. And every time you wrote a check, you wrote it down, who you wrote it to, because there's no online banking, right? And you'd put, I wrote a check for $100 because you would go to your bank account and you might have a $1,000 in your bank account. But if you wrote checks for $500, you really only had $500, right? So you would use your checkbook to like, I wrote five $100 checks, so really I only have $500. $500 is what I have in my head. I can't write a $600 check because it'll bounce. Now, with online banking, you don't need that because you just go online and everything's instantaneous.

A cash flow document is that version of managing your checkbook for a construction company. You might have a $1 million dollars in the bank on the top, and you have bills coming in from clients for another million. So on paper you have $2 million, but you might have one and a half million dollars worth of expenses that you have to pay for subcontractors. So really, you only have $500,000 in your bank. I mean, cash. But your bank account doesn't show $500,000, right? It shows your … so, you have to build this document that shows everything coming in and everything going out, and it's forecasted.

So the reason I started with the statement of cash flows versus a cash flow document, a statement of cash flows is real numbers, right? So it's actual, when you close your books at the end of the month, how much money came in and how much money went out. That's what a statement of cash flows is. A cash flow document is what a construction company uses as a forecasting tool. How much money am I going to have if I get paid on all of these bills, if all of my jobs pay me on time, and all of my subcontractors send their invoices in on time, and I've got weekly payroll for a month and all my other little expenses, what am I going to have at the end of that month? Actual money. And a lot of small construction companies are not good at doing cash flow. So they might have a cash flow statement, but they don't have a cash flow document. And I think that's something where we can really help people to understand the difference. One, two, that we can really help them understand it if they hire us, and three, that's how you manage your business, if you know how much money you're going to have in the bank at the end of the month.

So I was thinking that, like, probably a good way to describe this is to say one of them looks backwards, like this one, right? We started with this number, and now we have this number. But a cash flow document Is something you use every day in real time to figure out how much money you think you're going to have in the future. And I think that's probably the hook for how to get people to understand the difference, right. One of them is reporting on, uh, what happened in the past, and one of them is what's going to happen in the future. If we get paid on everything, if all the bills come in, if everyone pays us like they're supposed to, if everyone's payroll clears the bank, how much cash are we going to have at the end of the day? And people use cash flows to look ahead four and six months, versus a statement of cash flow looks backwards as to what did we have when we started and what do we have today. And I think that's probably a better definition for how people can understand that.

Jack Austin:

Yeah, no, that was where I got confused just a little bit because it was the … Yeah, it was the cash flow statement versus the cash flow document. So that even too, I was curious if those were the same thing. Yeah, I know they're separate now.

Greg Gorman:

Yeah, they're separate. And that's sort of the whole point of why I think it's important, because they're both called cash flows, but one is formally called the statement of cash flows or a cash flow statement. The one I just showed you. The other one is called a cash flow document, a cash flow spreadsheet. My cash flow, like, you can call them anything. Generally, an accounting team works off of that to say, how much money are we going to have in six months?

Jack Austin:

Right, absolutely. And so maybe that leads into a little bit. I was, you know, where we could go with that too is from your point of view, you know, working with clients, potential clients, how is looking specifically, I guess, at the problems you're trying to solve - How could, you know, somebody maybe get themselves in trouble if they don't understand the difference between those two? Like, what are some of the actual maybe bottom-line consequences that could happen because of that?

Greg Gorman:

Yeah, that's a great question. So, I would say a statement of cash flow, the formal document is, it's like the third most popular financial statement. So that's kind of how people describe it. Uh, you have a p and l or an income statement, right? So, you have a profit and loss, aka an income statement. That's the most important thing that people look at. The second most important thing is a balance sheet. And then there's the lowly statement of cash flows. That sort of just, what do we start off with? Where do we end up? Fine. So, you could get by without that, technically, because you could look at your bank account, right? Like you could say, on one, one I had $10,000, on two, one I had $12,000. Fine. What happened in between is sort of not important, but I've got 2000 more dollars. But a cash flow document, you can't run a business without it, especially construction, because. Because we work off of projects, right, in construction. So you have to track every project as an individual ... As an individual thing.

So like, here's an example. Say you have five projects and they all bill on the 25th of the month, right? One of those projects might pay you by the 31st. They might. They might pay you immediately. It's an ACH it hit your bank account and you have that money in your bank account. Four of those projects might not pay you until the next month. Right. Because they have a 30 day. Right. So, there's net 30 days. So, 25 months. So, 30 days later, you get paid on two of those four. So that means three people have not paid you yet, and it's already past due. So, I'm tracking all five of those, of those payments that are going to come in. I know I'm going to get paid on them. One has come in already. One came in 30 days later. Well, what does that mean?

That means three of them have not come in yet. So, if I went into my cash flow document and said, I'm going to get paid on all five of those, I think I'm going to have a million dollars in the bank. If I only get paid on two of those, I might only have $400,000 in the bank. I'm going to get the other 600,000, but I don't know when. So I've got to pay payroll. Right. I've got to make two payrolls this month. Instead of having a million dollars to pay off of, I only have $400,000 to pay out of, because that's all I've got. A statement of cash flows is only going to show you the 400,000. Right. It's only going to show you what you actually got in that month. A cash flow document is going to show you you're supposed to get another 600,000. So today I have 400, but I'm going to get 600. And when I get that 600, I still have to make payroll, so that 600 is really 500. Then I have to pay the light bill and the gas bill and et cetera. And that 500 is really 300. And by the time I'm done, after I pay everything out, I'm going to have $150,000 in my bank account. But right now, I don't have that much. And the only way to track that, what's coming, what's going, what's due, what's not due is a cash flow document. Does that kind of make sense the way you hear it?

Jack Austin:

Yeah. No, absolutely. Yeah. And so, um, another thing I think about, too, a little different, but still on the same topic of this, one thing Jeff and I talked about a lot was kind of, roles of project managers and kind of where the lines can get blurred sometimes between roles and responsibilities. I'm curious on this topic as well, specifically, just, you know, with you mentioning the importance of this, of course, like these types of documents … how do you see the ... I guess the breakdown of the responsibility for this? Just because it does touch probably so many departments of a company. Is this the responsibility as you see it, as far as maybe just a CFO, or kind of, your financial accounting teams? Or should the project managers be taking active roles and responsibilities trying to understand this, too? What are your thoughts on that?

Greg Gorman:

That's another great question. So, the cash flow document … so let's leave aside the cash flow. So, statement of cash flows. That's boring. And it's mainly just, if we do anything with it, it should be like, this is the statement of cash flows, and this is not, right? The responsibility for a cash flow document really just lies with, with two groups. It lies with the accounting people and the operations people, because the operations people are the ones who know I'm going to build. So, back to my example. Five projects, $200,000 a project. I know we've done five projects this month, so I think we're going to bill five times, and I think we're going to bill all of them for $200,000. But I'm an accounting person. I have no idea what happened in the field. I have no idea what the project manager signed off on. I have no idea what he approved. I have no idea if one of our subcontractors got sick and, or, got into a car accident and didn't finish his work for two weeks. So we can't bill for his work because he didn't finish his work. The only people that know that is the project manager and the operations team. So they have, they're the ones who say, what are we going to Bill? Right? They're going to tell the accounting people, we're going to bill five projects, and we're going to bill them all for $200,000. And that's the million dollars.

And then on the other side, they're the ones who say, I approved all these expenses, all these invoices are accurate. They're all in the system accurately. I know we owe $500,000 of that million out to our subcontractors, our vendors. How do I know that? Because the project manager signed the invoices and approved them and said, these are good to pay. So, it's a tandem thing. You have to ... Operations gives you the info, and then accounting tracks it. Like, that's a sound bite for how to think of cash flow. Operations gives you the data, and then accounting populates it and uses it.

Jack Austin:

Right, and you ... So, you really can't separate, you know, one from two or put, try to push off one on the other type of thing. It really has to be that collaboration.

Greg Gorman:

It really has to. I mean, an operations person could, in theory, do it for their project. Like, they could be the ones in their head. Like, this one project is $200,000. I'm going to Bill 100. I owe 50. I'm going to make 50. But they can't do it for the whole company, which is what a cash flow document is for. How's the company doing? How much money does the company have across all five projects? That could be five different project managers. Each project manager is doing their own one project, but the cash flow document has to. Has to account for all five. So, you can't have the data without the project managers, and the project managers won't know how the company's doing without the accounting people. And that's, and that one crossover is cash flow. How are we doing? Are we making money? Are we getting paid? Are we paying our payroll? You know, that, that's what comes out of tracking cash flow.

- End of Episode -

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