194. Cashflow Control With Andy Skarda

Welcome to another episode of Professional Builder Secrets. We recorded this episode live at the International Builder show in Las Vegas, but the content is still highly relevant for builders around the world. Today I talked to Andy Scarter, APB's head coach, and we discuss cash flow mastery and the art and science behind sustainable cash flow for a building company. We go into why cash flow is the number one reason building companies struggle to scale. The biggest mistakes the builders are making when it comes to financial risk and their cash, and how to implement a sustainable cash flow system that ensures stability. I hope you enjoy the episode. This episode of Professional Builder Secrets is brought to you by Apparatus Contractor Services. Apparatus provides full scope, end to end QuickBooks, Precision Construction accounting and CFO services for residential builders. If you feel like you can't completely trust your weekly and monthly financial reports or you feel like you're flying blind, Apparatus will rebuild and operate your QuickBooks accounting system and give you precision construction accounting capability you can trust. Learn more@apparatusteam.com or on the APB Rewards Partner Directory.

A lot of builders, if they don't understand things like the work in progress, accounting adjustment, and they're looking at a bank balance that includes cash that is already committed to subcontractors and not being able to separate out the cash that is there for them to run their business, they can get themselves into trouble very, very quickly. If a builder isn't aware of that, isn't watching that, essentially what they're doing is they're not even borrowing from Peter to pay Paul. They're effectively stealing from Peter to pay Paul. This is maybe a bit confronting, but they're running a Ponzi schem.

Professional Builder Secrets live at ibs. Here we go again.

Yay.

Andy, Scarlett, welcome to the show once again.

Thank you very much. Will, nice to see you again. Haven't seen you for at least eight minutes. Yeah.

On the other side of the booth. But we're talking cash flow in this session.

Cool.

Which is a really important topic. So as much as I know you want to make jokes the whole time, let's dive into reality.

Today Will, be serious. I know we've got a bookkeeper and a custom home builder sitting, listening, so I have to behave.

She's going to be quizzing you on everything you say.

Yeah.

Talk to me about why cash flow is important for builders.

It's the lifeblood of any business, but it's particularly the lifeblood of a construction business. We measure a whole lot of KPIs across the people that we work with specifically to make sure that their businesses are on track. But without doubt, you can kind of get by for a couple of weeks without leads. You can maybe get by for a couple of months without sales. But you can't get by a single day if you don't have the cash that you need to run the business. So there are all the cliches around things like, oh, revenue and revenue growth is critical. Absolutely. But if that's not converting into profit and ultimately into cash, you're dead in the water.

So what are some of the mistakes or challenges you see builders making when it comes to this?

Well, number one is not knowing their numbers. You know, in other words, not maybe being more focused on the vanity metrics. So, you know, we talk about the fact that revenue is a vanity metric. It's relatively simple to grow revenue. It's a lot more difficult to grow margin. And the next piece in that puzzle is making sure that that converts into cash. So a lot of builders will be very aware of what's going on in their bank account. But if they're not across their numbers, if they don't understand things like the work in progress accounting adjustment, and they're looking at a bank balance that includes cash that is already committed to subcontractors and not being able to separate out the cash that is there for them to run their business, they can get themselves into trouble very, very quickly.

We're going to talk about the work in progress accounting adjustment in a different session, but just to recap why that's so important would be really helpful.

I think in this industry we sit with, in a lot of cases, cash in the bank that doesn't belong to us. And the reason I say that is that if you look at the fact that we talk about a benchmark of 25% gross margin, which a lot of people in the industry would look at and say that's impossible to achieve. We know it's not because we have builders all over the world doing it every day, but for a lot of people, that seems like a long. It's a bit of a stretch, but they've got some idea of margin. Let's say their margins are 15%. Essentially what that means is every dollar that comes into their bank account, 85 cents of that dollar is already pre allocated to pay a plumber or an electrician or a painter or a Tyler. It was never their money. And the problem is when builders start using that money, which is cash, but it's not their cash, when they start using that to run their businesses, they literally, I Mean, this is maybe a bit confronting, but they're running a Ponzi scheme. Essentially, what's going to happen to them is if they don't get on top of that and understand their numbers clearly and only use the portion of the cash that is actually theirs, they're going to end up very quickly. That if their marketing slows down and in particular their sales slow down so that they're not bringing money into the business regularly, very quickly, they're going to. And it is quick. It's. It's a matter of weeks. When it goes barely up, it's pretty much instantaneous.

So what you're saying is that cash flow might not be their cash. I guess the bank account looks like you got cash, but it's not.

Well, exactly the problem. And I mean, I know we're not talking about wipa, but this is one of the reasons why we are so focused on margin and saying that 25% is the minimum. Because the science behind that is quite simply that we want to see builders being paid the money that they worth. And most builders aren't. Most builders take an immense amount of risk. They spend literally 70, 80 hours a week working their fingers to the bone. And at the end of the day, because they started off with margins that were too thin, they end up with nothing. Because all of that goes into running the business and there's nothing left at the end of the day. So understanding cash, what is in the business, what is in the bank account, how much of it is yours, how much of it is committed to other people, critical. And then understanding that your business is going to need different amounts of cash at different times of the year just because of seasonal realities, and making sure that in the months where there's a bit of extra cash that's being put away as a provision for what is coming down the road so that you can meet those obligations when they arrive.

Can builders go on for a while without realizing they might not have profit or cash in the company? Because it sounds like you might just patch it up. You get a new job in, a new job in, new job in, without realizing that first job wasn't profit?

And if they can keep that cycle going, they'll never learn until it stops. And then when it stops, unfortunately, very, very quickly, there's going to be a problem. Particularly the guys that we work with, there are large volumes of cash moving through their bank accounts all the time. So having a bookkeeper that understands whose money is whose and is keeping a track on that in our elite mentoring cohort, we recommend that those builders have a text message from their bookkeepers every day. Cash in, cash out, cash available every day. That's how critical it becomes when you start to manage it correctly.

How much cash should they have in the business?

Well, minimum, enough to cover their not yet received invoices for money that they've received. So, as most people listening to this will understand, most builders get paid on a progress basis. The danger they run into is that they issue an invoice and get paid before they get the invoices from their suppliers and subcontractors. So they need to make sure they've got enough money at any point in time to cover those outstanding invoices. They've then got to make sure they've got enough money to cover the overheads of the business because at the end of the day, they've got running costs. Rent, payroll, insurance, electricity, gas, water, all of those kind of things that keep the lights on, that keep the business running, that needs to be covered. And both of those stand ahead of net profit. It's only when you've covered those two that you've actually got any net profit. And obviously that is why most builders go into business is to make net profit. So being able to know what you've got and how much of that is available for use, critically important.

The overheads part we were talking about yesterday in pricing for profit, in terms of like a lot of builders aren't factoring that into the way they mark jobs up. Is that right?

That's number one. It starts a step back. A lot of builders don't know what it is. Okay. And I mean, that is a critical number to understand. To know what your building business actually costs to run on an ongoing basis is fundamental. If you don't know how much money that's in your bank account is yours. Add to that, you don't know how much it costs to run your business on a monthly basis. You buying trucks and boats. Because there's lots of money there.

Jet skis.

Yeah. It's just not yours.

Talk to me more about the consequences of not understanding your cash flow.

Well, I mean, the biggest consequence obviously is going bankrupt. That's the problem. We can start this kind of at either end of the discussion at the, the statutory or legal side, certainly in the countries that we work in, it is illegal for anybody to run a business knowing that they are not able to meet their current invoices at any point in time. And the reason why I mentioned the word Ponzi scheme earlier is that if a builder Isn't aware of that, isn't watching that. Essentially what they're doing is they're not even borrowing from Peter to pay Paul, they're effectively stealing from Peter to pay Paul. So particularly when it comes to tax time, if that is uncovered that they're actually trading in liquidation, that has huge consequences in terms of legal consequences, et cetera, et cetera. We take it down a step. There's nothing worse for a builder than getting to Thursday and needing to run a payroll run and there isn't enough cash in the bank. And that really comes back to probably a combination of margin and planning. So, I mean, we're talking in the moment about cash flow specifically, but one of the critical things that all builders need to do is to have a cash flow plan that is at least a 12 month rolling plan where they are measuring the money coming in, the money going out, and then making sure that at every point in that process they have sufficient money to cover the overheads of running the business. Obviously payroll, you can kind of keep your landlord waiting maybe a day or two, but not making payroll is obviously a critical problem, not one that anybody wants to deal with. And I mean, we're talking at the moment around the practical things we haven't touched on, the mental health and the stress. Now sometimes not knowing actually makes you feel a lot better because you're actually, you don't know how badly off you are.

Well, knowing can be scary as well.

Well, exactly. And, and we find with a lot of builders, when they first start being aware of the importance and go and look, a lot of builders find when they start that they are actually trading in liquidation. And obviously that's where coaches get involved to help them work the next six months, maybe to get margins up so that you've got a bit more headroom, get through that backlog and then get onto the front foot. From a cash flow perspective, what would.

You say to a builder if they were apprehensive about gaining the knowledge they need to be able to manage this properly?

The knowledge itself is not rocket science. We try very hard to get builders to understand financial management does not mean turning them into accountants. Most of the builders we work with have a sense of humor, which means it's unlikely that they would become accountants. Don't hit the accountants, Andy. No, it can be scary. I mean, there's long words again in that whole financial management thing, but we deliberately take what is happening in that space and really make them more aware of the story that those numbers are telling them. So from a cash Flow, perspective, knowing what the position is is going to tell you this is where we're at. And what that does is knowing what that situation is allows you to come up with a solution a lot easier. So you know that first 10 minutes of learning about cash flow might be a bit. This is not my area of comfort. We only grow when we step out of our comfort zone.

Okay, so I think we've amplified what the problem is enough. Let's talk about practical strategies. What can I build to do today, tomorrow, next week to start getting their cash flow in the right place?

Employ a good bookkeeper. That would be, that would be a really good starting point. Like so many other things, most of the builders we work with are specialists in a particular area. They can't be specialists in every area. So finding a good bookkeeper who they can trust, who's knowledgeable, who does understand the intricacies of it, making sure that she is properly briefed on what she, he is briefed on what the builder expects and needs from their cash flow situation, that's probably the first place to start getting a basic understanding of why it's important. The stuff we've been discussing now and in most cases, when people think through the process, it becomes fairly logical and pretty easy for them to pick it up. When I left school, I got an F for fantastic, for accountancy. I passed it, but by the skin of my teeth. And again, that was 120 years ago. But if I can understand cash flow, anybody can understand cash flow. Just takes a bit of time, bit of application.

This might be a rabbit hole, but how do you find a good big bookkeeper in the construction industry?

Know what you're looking for. At least know what WIPA is, at least understand your margins, know what you're looking for in your P and L and your balance sheet every month and make sure that the person you're talking to has experience, particularly in those areas. If you can find somebody that's worked in the building industry where they understand the nuances, because that's probably the key. A lot of people that are general bookkeepers who are not experienced in building bookkeeping, a lot of the fundamentals are the same. The danger lies in those couple of little things that are very different in this industry.

So the builder needs to at least know what the important, important things that the bookkeeper needs to know are.

Absolutely. Otherwise it's the blind leading the sighted, which you know is never going to be a good outcome. It's a key position in the business for, you know, all of the Reasons that we don't need to go into here. So on top of the technical knowledge, trustworthiness, confidentiality, those kind of things come into that space as well.

Okay, so you've got a good bookkeeper. How are you managing cash flow and looking at all, looking after it all a day to day basis, you're probably.

Going to get bored hearing this, but it starts with a plan. If you're not in touch with the ebb and flow of your business and what I mean by that is every single month, definitely every quarter will be different. You've got seasonal payments, you've got annual payments, you've got half yearly payments. What does that mean? Well, that means that different times of the year need different amount of cash. So that cash flow planning scenario is always going to revolve around knowing when we need more money, knowing when we don't need as much money, making sure that in the months when we don't have enough, we're able to draw on the reserves that we've created. And then obviously in those months where we've got more than we need, making sure we are creating those reserves, putting it away. So the first piece of the puzzle is plan. Second piece of the puzzle then is measure it, go back and make sure. As I said on some levels we talk daily, but to be totally honest, weekly is probably enough. In most building businesses should never go beyond monthly. So in terms of reconciling that bank account and understanding exactly what is in there, etc, etc. At least monthly and then it'll become part of your financial reporting in your profit and loss in your balance sheets, you'll be tracking your cash on an ongoing basis. We take it a step further because we get our builders to calculate their work in progress. Accounting adjustment. We add the step of the bookkeeper, always confirming that there's enough cash to cover wipa. That's step one. And then obviously the rest of it runs from there.

You mentioned some of the financial reports there, but how is this actually practically getting done on a day to day basis?

Well, obviously again if you have a bookkeeper, that's pretty much their wheelhouse. That's what you've employed them to do. We have a lot of builders that do a kind of self day to day with an accountant who does monthly reports or annual reports. The trick there is to stay on top of it. If you're doing it yourself, make sure that you've set aside time in every week to capture all of the data that needs to go into your bookkeeping or accounting system. And then making sure at the end of the month, if you are doing it yourself, which is probably not recommended in most cases, it makes sense to at least have a professional having a look at your reports once a month, putting those together, making sure that from a statutory perspective, at least you're on track. You don't want to get to tax time and then find out that 11 months ago something went wrong and it's just been amplified across the year. So making sure that those financial reports are up to date and accurate, maybe the other piece in that discussion is timely. We like to have our builders getting those financial reports by the eighth of the following month. Because really, any report you're getting is historical data and you want to be able to make good decisions. You can only make good decisions based on good info. And the sooner you get it, the sooner you're able to look at what the picture is and then decide what you want to do from there.

I'm always referring back to the State of Residential Construction industry report source 2025. There's a stat in there, and I don't know the exact numbers, but essentially builders that report monthly on their finances achieve more profit, like a simple habit of doing that. But there was an alarming amount of builders that weren't even doing that on.

A monthly basis because it's scary. As I said earlier, it's the piece of the business that most builders. I mean, I heard you chatting to Russ yesterday. It is an area that they would abdicate on just because they don't feel comfortable in that space. As a builder, you don't need to know how to do every entry, but you do need to understand the fundamental concepts. And if you can get your head around those, then you can employ somebody who can come in and actually run the books for you properly. That combination will make it clear. The reason that I think so many people stay away from it is they think it's very complicated.

So what questions would you ask a bookkeeper every month to make yourself feel on top of it and comfortable about where you're at?

Well, probably cash once a week at least. Like would happen in most parts of the business. Your bookkeeper's workload, depending on whether they're running payroll for you as well, is going to ebb and flow. My history says know those ebbs and flows and stay away from them when they are knee deep in numbers. Understanding that, particularly once the calendar month ends, that first week of the next month is your bookkeeper's busiest time. Make sure they've got what they need and leave them alone them actually get those reports done, get all the journal entries done, all the reconciliations done so that by the 8th of the month what they give you is accurate and valid. Other than that, difficult question to answer. Only from the perspective that so many builders use bookkeepers in different ways. Some of them do everything, so they do accounts payable, accounts receivable, all of the data entry, et cetera. Others use them just for specific parts of that process. But even if they break that down kind of into its components, what you'll generally have is people running accounts receivable and payable, reporting to the bookkeeper or the financial controller. And then all of that data that happens during the month has to end up in a place where they can actually do the reports at the end of the month as a monthly scenario.

Assuming you're talking about a bookkeeper working within the building company, what would happen if that was an external accounting firm or something like that?

Again, it wouldn't really change what the builder needs from them. And that's a very good point. I mean, a lot of builders will use an external bookkeeping service rather than an internal bookkeeper. At the end of the day, it's not as important where they are as making sure that the data that the builder needs is available when he needs it. That's really the critical piece in it. I know guys that use virtual bookkeepers these days. The beauty of so many of our systems is they're online and you can access them from anywhere. So, you know, in the Australian context, we've got builders that are based in one state and their bookkeeper is three states away, doing their books on a daily basis. You know, so it's possible to do it remotely. Absolutely.

What have we missed? Cash flow mastery is a pretty big topic. What have we missed? What's important to builders?

The only thing maybe, and I mean, we've got a lot of builders that run into this scenario that they come out of survival mode. They get the business to the place where they are making enough money that they can cover their work in progress, accounting adjustment, they can cover their overheads. Now they start to make actual profits and now they start to see this bank balance growing. They've got a bucket of cash now, what to do with it. So again, making sure that they're getting good advice on. We always talk about reserves. We want to make sure that they've got 12 months overheads in a reserve account. A lot of people get confused around that because they see that amount of money as an investment. When in fact, it's not, it's an insurance policy if we're going to try and give it a name. But using their cash then to build up those reserves. I always tell my clients that cash reserve is your best sleeping pill that you're ever going to get. Knowing that if you don't make a single sale in the next 12 months, you've got a cash reserve of 12 months, overheads or fixed expenses available puts you in a completely different mindset and takes away that desperation. Yeah, you know, you don't have to take every job that comes across your desk. You can pick the jobs that are the right people at the right margin because you know you've got the backup. So reserves would be the first thing. And then you and I did a session yesterday on strategic planning. We spoke about the bhag. You know, if you want to set your family up financially for the future, you've got to have some help around how to invest that extra cash that you've got to make sure that it is going to create the outcome that you're looking for, medium to long term. So again, we back to as much as on a week by week, month by month cash flow basis. WIPA plus overheads is important when you get into the well, I've got some cash reserves. Setting up the future is important because you need to do that before you start buying toys.

As you said, it's the best sleeping pill you can get if you've got 12 months of cash reserves. Plus you'll have more confidence in sales conversations and everything anyway.

Exactly. And I mean, we haven't gone into the mental health side, but the stress, the stress of not having enough cash for any one of those things is just debilitating. You know, they talk about stress in any situation causes, you know, narrowing a focus, tunnel vision. People become desperate and when desperate people make decisions, they're generally not good decisions.

Well, perfect. Andy, thanks for coming on Professional Builder Secrets again.

Thank you for having me.

No, always good. And you'll be up next at 1:00 clock with Nick Schiffer.

I've got Nick Schiffer, the maven of the building industry coming in.

Yeah, perfect.

It's going to be fun.

And then we'll be every hour on the hour today and tomorrow as well. So thanks for joining in.

All righty, See you soon.