Mobilization draws: a smart cash management practice for contractors

January 10, 2017

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You would be surprised how many construction companies set aggressive goals for landing new projects, achieve their goals by winning many of those new projects, only to find that they grew themselves right into a cash crisis. They say "Let's go out and win some new and bigger projects. Everything will get better if we just increase the number and size of the projects we win."

Verne Harnish, in his book Scaling Up, says it beautifully: “Growth sucks cash – the first law of entrepreneurial gravity.”

The reality of business is that growth, especially rapid growth, is almost always a net user of cash. This is especially true in the early stages of a new project.

Mobilization Draws

Fortunately, there is something you can do to improve your cash flow as you grow and land new projects: consider using a mobilization draw at the very beginning of each project.

A mobilization draw is a payment you require from the customer at the time you begin the project. It’s the perfect time to require a draw on the project because it marks the very beginning of your work. It’s the point where you are beginning to deploy assets and people to start the job. Or, stated more directly: it’s the time when you are starting to invest cash in the project.

Mobilization is defined at businessdirectory.com as “activation of a contractor’s physical and manpower resources for transfer to a construction site until the completion of the contract”.

One large state’s Department of Transportation describes mobilization costs on a construction project this way: “includes preparatory work and operations, including, but not limited to, those necessary for the movement of personnel, equipment, supplies and incidentals to the project site, for the establishment of all offices, buildings and other facilities necessary for work, on the project, and for all other work and operations which must be performed or cost incurred prior to beginning work on the various items on the project site.”

Mobilization costs could easily reach 10% of the total contract amount. Of course, the larger the project, the larger the cost – and the larger the negative impact on cash flow.

Smart cash management pays big dividends

A mobilization draw provides cash flow even before your progress billings begin. Without the mobilization draw, the project becomes a drain on cash at the very beginning of the job. It goes cash flow negative from day one. And going cash flow negative hurts your company in a number of different ways, including:

  • increasing the chance that you will need to borrow money
  • reducing your profit if you end up borrowing money
  • increasing risk since you will be carrying a larger receivable for a longer time
  • reducing the number of projects you can work on at any given time
  • forcing you to use cash that could otherwise be used to grow the company

Accounting can play an important role

Ed Lette and I had the opportunity to present at a cash management seminar put on by the Construction Financial Management Association (CFMA). We had a room full of accounting and finance professionals (as well as business owners and project managers) from across the construction industry, including general contractors, specialty contractors, developers, construction managers, architects, and engineers.

The seminar was focused on cash management and it began by asking this very insightful question:

“Did you know it’s possible for a construction company’s Controller/CFO to generate more profit on a project than the Project Manager?”

I love that statement because it really makes you think about the role accounting and finance (and good planning in general) can play in the success of a construction company. From pre-bid planning, to contract review, to monthly billing and payment schedules, and ultimately to project closeout and collecting the full amount due on the job, good planning can be the difference between success or struggle.

And it all starts with a smart, effective approach to cash management.

Next step

Have everyone in your company, whether in accounting, finance, project management, or elsewhere, begin thinking about how mobilization draws could be used in upcoming projects.

It will help you build a stronger business and improve your cash flow.

Free guide to cash management

 

Topics: Featured, Accounting & Finance, Content Type

Philip Campbell

Consultant, Author

Philip Campbell is a CPA, consultant, and author of the book A Quick Start Guide to Financial Forecasting: Discover the Secret to Driving Growth, Profitability, and Cash Flow Higher. This new book provides a straightforward, easy-to-understand guide to one of the most powerful financial tools in business: a reliable financial forecast. He is also the author of the book Never Run Out of Cash: The 10 Cash Flow Rules You Can’t Afford to Ignore. The book is a step-by-step guide for business owners and managers who want to better understand and manage their cash flow. Since 1990, Philip has served as a financial officer in a number of growing companies with revenues ranging from $5,000,000 million to over $1,000,000,000. He has been involved in the acquisition or sale of 33 companies (and counting) as well as an IPO on the New York Stock Exchange. Philip loves helping entrepreneurs and business owners think strategically about the financial side of their business. His consulting work is focused on providing the financial insights that leaders need to increase profits, improve cash flow, and enjoy the fruits of financial success in business. What really sets Philip apart from the average financial person you meet is his passion and excitement about helping entrepreneurs and CEOs take control of their cash flow. In fact, early on in his career, he focused and “preached” so much about the importance of cash flow that people now call him CASH. Philip is the founder of Financial Rhythm, a website devoted to people who are serious about creating financial health, wealth, and freedom in their business. If you're an entrepreneur or business owner, Financial Rhythm is a place to get simple, actionable strategies for creating a financial future that is bigger and brighter than your past. Philip lives in Austin, Texas. You can email Philip at pcampbell@pdq.net.
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