During the first half of 2020, contractors have faced the daily challenge of making difficult decisions due to the COVID-19 pandemic. Compliance with social distancing and increased safety requirements, job delays, cash flow strains, predicting an uncertain future, maintaining headcount, and addressing remote workforce concerns have been significant and unforeseen issues that contractors have had to tackle.
Citrin Cooperman conducted a recent anonymous survey of construction executives in the Northeastern U.S. This survey revealed the following noteworthy crisis management statistics:
• 89% of executive teams are meeting at least daily
• 74% do not use a cash flow projection tool
• 42% are concerned about cash flow
• 37% do not use forecasts to make ongoing business decisions
• 25% do not close their books monthly
• 17% compliance rate on data privacy and security
While executive teams are meeting frequently due to the nature of current challenges, many may not be maximizing available information to make decisions. Cash flow projections are important for optimizing success in good economic times and become more critical during hard economic times. Forecasts are an essential aid in operations management and provide comfort to bonding agents, lenders, and other stakeholders in the construction business.
In order to successfully manage the challenges that may impact your construction business, the following areas should be considered when making critical decisions:
Although short-term cash flow concerns are understandable given current economic conditions, they remain unwelcomed surprises to stakeholders. It is advisable to stay ahead of the curve through forecasting so that swift action can be taken to remediate issues, maintain liquidity, and give proper notice. Bonding agents and lenders are often willing to work with their customers during difficult times and can provide more help with as much advance notice as possible.
A cash flow model can be simple or complex depending upon business needs. Inputs into the cash flow forecast for contractors include expected collections from billings and other sources of cash (i.e., a line of credit or term financing) and expected disbursements for payroll, subcontractors, materials, debt service, rent, insurance, and other operating costs. When completed on a rolling 13-week basis, this analysis can highlight periods where a contractor’s cash position is expected to be tight in the near future.
Long-term forecasting, for six months or multiple years, can provide insight to an executive team regarding the expected future performance of the business and the contractor’s ability to withstand periods of economic difficulty such as those presented by the current pandemic. Scenario analysis can be applied to model different results based on various circumstances. Understanding your business’ ability to endure difficult circumstances will provide the information needed to chart the courses of action to minimize negative impacts.
Monthly Internal Financials
Reliable and timely information is key to sound decision-making, which underscores the importance of monthly internal financials. Positive economic trends of recent years, or headcount reductions of the past few months, may have rendered the production of regular internal financials of secondary importance or otherwise resulted in delays of this information. However, the pace of change of the current pandemic places a higher premium on timely and accurate financial results to guide business decisions. Otherwise, contractors are left to make important decisions based upon stale or incomplete information. Bonding agents, lenders, and other stakeholders may also request more frequent financial reports for their decision-making purposes.
If contractors do not have sufficient in-house personnel to close their books on a monthly basis, it is recommended to seek the assistance of an outsourced part-time resource. This will provide management, bonding agents, lenders, and others with reliable financial information when they need it to make sound decisions.
Since the beginning of the pandemic, there has been a sharp increase in the number of cyberattacks (a 400% increase according to the FBI), which have accompanied the rise of working from home and telecommuting. Hacking, phishing, and social engineering schemes have each increased due to the vulnerabilities in the now widely used virtual environments of many contractors.
As noted above, the contractors surveyed scored very low in data privacy and security compliance. With the elevated level of exposure as cybercriminals gain a foothold in corporate servers, contractors should re-assess their cybersecurity profiles to protect their businesses and determine if they are prepared for an attack.
Contractors should consider addressing the areas mentioned herein to assist with critical decisions. Working regularly with your CPAs and business advisors to implement these practices can help move your business forward.
Citrin Cooperman is a nationally recognized, full-service CPA firm, currently ranked in the U.S. top 25, with a dedicated Construction Practice. The firm offers assurance, tax, and business advisory services to help clients remain competitive in today’s market.
Citrin Cooperman Can Help
Contractors that complete Citrin Cooperman’s free 15-minute endurance assessment will receive a customized report, which outlines areas to consider in shaping 6 to 12 month decisions involving access to capital, expenses, and staffing. The report also provides comparative industry metrics and is useful to share with bonding agents and lenders to demonstrate preparedness. For more information on the endurance assessment or the resources we developed to assist you navigate through these challenging times, please visit our COVID-19 Response Unit (CRU).
Michael T. Crawley is a partner and audit practice leader in Citrin Cooperman’s Providence office, with more than 17 years of experience. He provides audit, financial reporting, and CFO consulting services to clients in various industries, with a strong focus on construction contractors.
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