Managing Cash Flow in A Project Based Business

a.k.a. "Are we going to make payroll this week?"

Cash is King

Managing cash flow is crucial for the success of any project-based, material-heavy business like industrial machinery. Such businesses face unique challenges due to the fluctuating costs of materials, the timing of project payments, and the need for flexible financial strategies to maintain operations.

I find that many small businesses do a poor job of managing this cashflow. While they keep their heads above water they often hold off on hires or purchases because they are concerned they “might” not have enough cash at a future point. In reality (and hindsight) they find they were perfectly OK but now have delayed that hire or purchase by several months.

Project Based Business Cash Flow Cycles

Before we discuss how to manage this cash it’s important to understand how project based businesses work in terms of cash outlays. The chart below illustrates the relative percent of materials and labor that are spent on a custom industrial machine project as a function of time. I took a 20 week long project as an example and broke it into 4 major sections

• Engineering & Design

• Procurement

• Assembly

• Debug

Labor & Materials as a Function of Time

Now while many businesses have direct employees the labor does not really change (they are there 40 hours a week if they are on a project or not). However for those who subcontract this work out, it’s important to understand the cycle. Regardless, direct employees are still a cost and one that you should track.

As for materials we should note that you often do not need to pay for these materials for another 30-90 days (depending on your terms). This graph shows WHEN they are ordered, not necessarily when the bills are due.

In the Engineering & Design phase you have very little material spend (except perhaps deposits for some long lead time items, like a robot or feeder bowl). However you do have a large amount of labor as expected.

Next comes the Procurement phase. This is when all the parts get ordered. Considering we are still having some supply chain issues typically engineers will move onto new projects during this phase and not charge very many hours. This is however when the cash begins to really flow out. By this time most integrators already have 60-70% of the cost of the machine in hand.

Unless you’re working in automotive. 😮

During Assembly the hours began to tick up again as the mechanical and electrical teams begin to put the system together. Materials begin to trail off but depending on billing cycles can continue well into the next phase.

Finally in Debug the material spend settles down while hours pick back up. Typically there is a little ramp up in labor and materials at the very end of the project as those last minute additions and fixes come to light.

And while each project and company is slightly unique, most follow this general curve (plus or minus).

Tracking Cash Flow

As mentioned before, many smaller companies don’t formally track their cash flow. They look at AR, AP, and what’s in the bank and do a bit of mental gymnastics and either a) relax or b) freak out. Ironically it’s these small companies that most need to be diligent about cash flow.

One tool that everyone needs is a cash flow forecast. If your MRP/ERP/Finance app does this for you that’s great. But many do not. So we go to our trusted friend: Excel.

Essentially you need horizontal columns of dates (weekly is usually good) and vertical rows of the following (by project):

• Accounts Payable

• Accounts Receivable

• Projected Project Outlays

• Operating Expenses

• Cash On Hand

Example Cash Flow Projection Chart

Using these numbers (aligned with dates as to when the payments/receipts will hit) allows you to accurately map out the cash flow.

The first pushback I always get is, “but I don’t know when I’m going to be ordering all these parts”. That’s where our first graph comes into play. Once you know when the procurement phase is going to begin you can begin to map out the costs. Take your budget and apply it in chucks along the timelines. As you get closer to these dates the amounts and dates will become clearer and your model becomes more accurate. You also should have a project schedule with payment milestones. With this you can map out the cash inflows.

Now with the forecast out 6+ months (I always projected out at least 6 months) you can see when the spikes in cash (in and out) are happening which allows you to better plan your spending. As you sell new jobs, their incomes and outlays get added to the spreadsheet.

Managing Cash Flow

Now that we know how much cash we have for the next several months you need to make sure you manage that cash. This means being diligent about several things including:

• Terms

• Factoring & Discounts

• Milestone Progress Payments

• Lines of Credit

• Vendor Pricing

Terms: the bane of existence for any machine builder. What used to be Net 30 has now turned into NET 90 and even 120. I saw NET 180 on a RFQ once (and promptly threw it into the garbage).

While negotiating terms can be difficult, don’t just give up. Ask your customers to work with you. Get creative on the progress payments if necessary. If they demand you live by the lousy terms then be sure to add some % to the cost to help fund that float. You’re not their bank. At the same time ask your suppliers if they can work with you. That supplier that is normally NET 30, ask to go to NET 60 for this particular project.

Factoring & Discounts: there are companies that will “buy” your receivables and for a small percentage (2-5%) will pay you right away. This is known as “factoring'“. One large one is C2FO and many of our customers used it. See above about adding in a % fee to your costs.

You can also offer a discount to your customer if they pay early (agin be sure to factor this into your pricing). Along the same lines, also be sure to look at your suppliers. Many of them (McMaster for example) offer discounts if you pay by NET 10. While it’s not a large discount it can add up over the course of a year.

Milestone Progress Payments: most machine builders work on progress payments. Be sure you structure your payments sucht that they align with the cash outlays. Progress payments that are heavily weighted towards the end of the project (looking at you again automotive) force you to float the spend for longer. Also be sure you are staying on top of these payments. When you have many projects going on at the same time it’s easier than you might think to forgot to invoice the customer for that next payment. They can’t pay if you don’t bill.

Line of Credit: If you don’t already have one, get one. Banks are much more likely to lend you money when you DON’T need it. Have a healthy chunk of cash that is available to you to help you get past the “thin” times. Then exercise that LOC. It shows the bank that you can borrow and reply. The small amount of interest (if any) is worth the boost in your credit score. Of course you need to be sure the cash is indeed coming in to repay that line of credit. Don’t spread yourself too thin.

Vendor Pricing: While not really a “cash flow” management issue you should be having periodic discussions with your suppliers about pricing. Many of you have seen pricing increases over the years (especially during COVID). Now that the economy is slowing a bit it’s time to perhaps go back to your suppliers and discuss some discounts in pricing. I’m not saying you’ll be successful but it never hurts to ask.

Conclusion

Effectively managing cash flow is the lifeblood of project-based, material-heavy businesses such as those in the industrial machinery sector. The challenges posed by fluctuating material costs, payment timings, and the necessity for flexible financial strategies are formidable, but not insurmountable. By leveraging tools like cash flow forecasts, understanding the dynamics of project-based cashflow cycles, and being strategic about financial management practices, you can navigate these challenges successfully.

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The Automation Navigator is brought to you by Automation AMA, a company founded and run by an industry leader in assembly, robotics and packaging. Automation AMA offers a variety of services to help you on your automation journey or to help fine tune your engineering, sales, operations and business development departments. Learn more at www.automationAMA.com or shoot me an introductory email.