Cashflow Management Tips for Paving Seasonality

Asphalt businesses face the challenge of a short busy season dependent on regional climate, day-to-day forecasts and large fixed asset requirements. Without accurate forecasting and proper cashflow management, this short window to complete jobs, and the resources needed to ramp back up quickly in the spring, can lead to cashflow challenges.

As a CFO, I’ve had the privilege of helping construction businesses successfully manage cashflow through seasonality. Based on this experience, here are some financial best practices to survive the paving offseason and to maximize revenues during the spring and summer.

Track Cashflow

The current and projected timing of the industry cycle where the asphalt business operates will determine the cashflow management strategy. Understanding and forecasting cashflow based on this cycle is the first step to healthy financial management.

Consider keeping a rolling 12-month forecast and analyze year over year data. Use this data to predict the cash reserves or financing that will be needed for the next offseason and at the beginning of the next busy season, when the business is paying out more than it is pulling in. During the winter months, most paving businesses must survive on the cash they generated during the warmer months. However, it’s also important to factor in the “ramp-up” period where production takes off quickly but A/R collections lag by 30-45 days. Month over month this can have a catastrophic impact to cashflow.

Also compare year-to-date progress and forecasted expectations to determine if this year’s seasonality is consistent with the prior year. If the result shows a shortfall (possibly due to growth or a large asset purchase), recognizing that fact quickly and taking proactive steps to increase collections or cut expenditures can help to offset what was not planned for in terms of seasonal fluctuations.

In some cases, cashflow projections may show building cash reserves as an impossibility. If financing will be needed, knowing in advance will allow the time needed to apply for and secure a loan. A better option, if the business can qualify, is to be prepared with a line of credit that is properly matched to the size of the business.

Right Size the Fleet

Equipment and its maintenance are large expenses, making fleet right-sizing a good place to start when optimizing cashflow. Use the off months to perform a year-in-review, evaluating how often you use your equipment and vehicles, weighed against repair costs and useful life of the equipment.

Is it a good time to sell any existing equipment? If equipment is underutilized, selling it can be a great way to access cash quickly, pay down debt, and cut future cashflow needs by eliminating the monthly payment. In some cases, it might make more sense to subcontract out (especially when a specialized laborer is needed to operate the equipment) or rent the equipment per job.

Is it the right time to purchase new equipment? While new purchases might not seem like the place to start for improving cashflow, replacing equipment that could break down at the peak of the busy season can prevent future cashflow woes. Make sure to ask your tax professional about any benefits of purchasing equipment that might help to make the business case.

With buying equipment in the slow season, it’s important to balance the discount against having to make payments on the asset for 4-6 months before it starts producing significant revenue. For example, a client decided not to buy a paver in November, despite being offered a considerable discount, because they knew there wouldn’t be the demand for it until Spring. The client felt it would sit in the yard and our analysis showed over half of the savings would be taken up by the monthly payments. Instead, this client put in an order for delivery in April/May when it would immediately be put to work and generate revenue.

Tip: Take the time to perform a cost-benefit analysis per equipment purchase.

Simply making the right choice of buying versus renting can make a considerable impact on monthly cashflow. We had one paving customer considering purchasing a new skid-steer rather than continuing to rent the equipment whenever the extra machine was needed. The full cost-benefit analysis, when considering maintenance, useful life, and residual, showed that purchasing the new skid-steer would save them almost $8,000 per year when compared with renting—and that was before considering increased revenue or more efficient operations from having the new equipment in the fleet.

In most cases, buying versus renting will be the more cost-effective option. The exceptions are for short-term jobs, where the equipment would sit unused after, or specialized jobs, where renting both the specialized labor and the equipment together versus finding temporary specialized labor will reduce headache. While this serves as a good rule of thumb, it is still worth it to complete the cost-benefit analysis.

Beware of Gimmicks

Leasing versus buying equipment to ease cashflow stress with lower monthly payments can be a good option in some cases. Make sure to consult your tax professional about the impacts of leasing versus buying equipment, as you may be able to write off the monthly payments.

Many times equipment companies will offer seasonal payment plans for relief during the slow season, but this may come with a higher interest rate. We’ve also seen “equipment finance plans” wherein the buyer makes X number of payments of Y dollars and the equipment is paid off.  In the couple examples of this we’ve seen, the servicing company claims there is no interest or principal balance. The balance they told us was the number of months left on the “finance plan” multiplied by the monthly payment. We backed into the interest rate and got something like 7-8% when market rates were half that figure.

Diversify Services

Offering additional services to anchor clients (e.g. winter ice and snow removal) is a strategy to keep revenues coming in during the offseason. For paving businesses, the viability of offering these services depends on whether the region gets frequent enough snow and ice fall to warrant keeping on the staff needed to operate the equipment.

Paving businesses may already have much of the most expensive equipment needed for snow plowing. In general, it is not recommended to make significant purchases to offer services not core to the business. It is important to weigh the cost of the attachments or snow packages that might be needed to outfit existing equipment to be able to perform snow and ice removal against the forecasted revenue from offering the services

In addition to improving cashflow, offseason services also help with another seasonal challenge—the ability to continue to offer hours to talented crews that will be essential when the paving season wakes back up.

Invoicing

While most content around paving industry seasonality focuses on how to survive the offseason, our experience is that securing the financial resources needed to support the intense ramp-up at the beginning of the busy season can be equally as challenging.

During this period, the paving business is often paying out more than it is taking in. Prompt and smart invoicing policies can help to ease cashflow strain during this period. We encourage our clients to include payment terms in their contracts and enforce them. Proactively bring them up to the customer during the quote process and if not followed, it should be discussed with the customer before the next project.

For example, rather than billing at the completion of a large project, consider invoicing in smaller amounts at each point in the project. In most cases, this will prompt faster payment from the customer and keep at least some cash coming in to help with the subcontractor and supplier invoices already due as well as the upcoming payroll.

Cashflow is a topic of improvement for most businesses, regardless of seasonality. For paving businesses that do experience the challenges of seasonality, it’s especially worth securing an outsourced CFO or strategic financial resource to audit and provide recommendations for improving cashflow. These resources can also help to establish with confidence the tracking and reporting needed to change processes to improve cashflow and better prepare for seasonal ups and downs.

Jeff Heybruck is the founder and CFO of Lucrum Consulting, where he brings more than 15 years of accounting experience and strategic financial expertise in the construction industry. Jeff holds a Master of Accounting degree from UNC-Charlotte. You can reach him at jheybruck@lucrumconsulting.com.