Project Accounting in Construction Trades

What happens when cash flow doesn’t match the work?

Challenge: 

The Vant Group was representing husband and wife owners of a residential/commercial paint company.  Like many construction trade-related businesses, our clients had projects that spanned different financial months and fiscal year.  But unlike other project-based businesses, our clients were using the Cash Accounting method.

Our mandate was to find a motivated and qualified buyer so our client could transition to the next venture.  As always, we assisted both sides with the overall process including obtaining an SBA Business Acquisition Loan.

Almost immediately, we were able to find a great buyer and negotiate a favorable Letter Of Intent; and the buyer proceeded with the SBA loan process.  As the bank was in the process of approving the loan application, the paint company closed its first fiscal quarter, so the bank asked the buyer for Q1 financials.

First Quarter results indicated that this year’s cash flow would be significantly lower than the previous year!:

• Revenue
  • Revenue for January was significantly lower than the previous year.
  • It is normal in a seasonal business like this for the winter months to be softer, but that did not fully account for the change.
• Expenses
  • Fixed Expenses were on par with any given month in the year.
  • But Variable Expenses, when compared to Revenue, were significantly out of line.
• The previous year’s cash flow seemed much stronger than the current year-to-date results indicated.
• This perceived fall-off in performance caused the bank to express doubt in the loan, and the buyer called us in a panic.

Approach:

Where expert intermediaries add critical value:

• Transaction and Industry experience
  • Our intermediaries have lived through countless transactions, and are experts in spotting potential deal-killers like this.
  • Construction trade businesses often execute large projects with multiple stages of cash receipts and expense disbursements.
  • Different client companies use different methods for matching these flows to financial periods.
• What we discovered
  • Near the end of the previous year, our client had landed a large paint project.
  • Their customer made a large down payment to our client, and our client booked it as revenue that year (as would be expected in the Cash Accounting method).
  • As our client began working on the project in January, they started incurring costs. These costs were booked in the current year.
  • So the revenue was in last year, and the costs were in this year!
• How we responded
  • We conducted a detailed analysis of the large paint job, and other smaller jobs that had the same impact.
  • We gathered documentation including invoices and receipts.
  • We conducted detailed analysis to match the revenue, expenses, and work completed to the appropriate financial period. This showed that the business was still performing strongly.
  • We packaged that analysis in a straightforward document that the buyer could present to the bank, and made ourselves available for follow-up questions.

Result:

The loan was approved soon thereafter, and the transaction closed at the agreed price!  Both sides were happy and were glad The Vant Group was there to keep the process moving forward even when a potential “deal killer” arose.