Cash Flow, WIP, and Tax Strategy: A CFO Playbook for $1M–$30M Contractors with Cody Daniels, CPA

Rishi Srivastava (00:41)
Today our guest is Cody Daniels. Cody, welcome.

Cody Daniels (00:46)
Yeah, thanks Rishi. Happy to be here, happy to chat with you today.

Rishi Srivastava (00:50)
The first section here is on back office and operator playbook. When a $1 million to $30 million GC calls you mid-project saying, cash is tight, what three reports do you open first, and what red flags do you look for in each?

Cody Daniels (01:09)
Yeah, I first, I think we’re going to jump right into the AR aging report. And what we’re going to look for is, you know, what receivables do we have that are, you know, maybe 60 plus days outstanding and, you know, work to determine if there’s anything we can do to accelerate the collections on those. You know, in my experience, most contractors are not out there overspending. So when cash flow becomes a concern, it’s typically because they’re

receiving payments quickly enough. They have slow paying clients and that tends to drag things down. So that would be my first report is AR aging and we’re gonna look at the things that are a little bit stale and try to collect those. From there, I’d probably look at their WIP schedule and determine if they’re under billed on jobs. Obviously the AR aging is gonna let us know if we have billed jobs and whether or not we’ve collected those.

but the WIP schedule is gonna tell us if we’re behind on billings and haven’t sent invoices out. And obviously if we don’t send invoices out, we’re not gonna get paid. So I think those two reports for most contractors are going to address the vast majority of kind of cashflow type issues. From there, to me it would be a little bit more contractor specific. What are we gonna dig into? We’re certainly gonna look at job costs and we’re gonna look…

to see if cash outflows are consistent with expectations. I mean, do we have materials costs that are exceeding our expectations? Do we have jobs where we’re spending significantly more labor than projected? So we do wanna monitor the cash outflows as well, but in my experience, it’s more of a cash inflow issue for most contractors.

Rishi Srivastava (02:43)
Inflow is tough, you know.

What’s the most common chart of accounts mistake you fix for growing contractors? And how does that misclassification ripple into bad job cost decisions?

Cody Daniels (02:57)
Yeah, I’ve seen this with a number of clients that I’ve onboarded here in the last few months and it’s that they’re not breaking expenses into different accounts. And what I mean by that is, you know, they’re typically dumping all of their accounts into a single account on the chart of accounts and the direct costs, you know, maybe it’s field wages are not being shown under cost of goods sold.

or the indirect costs are being grouped up with cost of goods sold. And really those items need to be split and payroll is almost always one of the most common instances of that issue popping up is all the payroll goes into one expense account and we really need to be splitting that out. And the job costing issue that that can cause is if you don’t have a good handle on, you

wage costs versus your indirect wage costs, it’s going to make it much harder to accurately bid jobs. You’re not going to know, obviously, again, what the direct costs going into that job are and how you need to calculate those. for the clients that I’ve been working with, they don’t have a good handle on their overhead. And so they’re frequently not factoring in that overhead rate, you know, into the bidding on a consistent manner. So being able to come in and split those

costs in between like a direct cost and an indirect cost. And there’s a lot of costs that sort of tie into that. If it’s payroll that’s being lumped into one bucket, typically payroll taxes are being lumped into one bucket. Other employee benefits, insurance, retirement plans, it’s all getting dumped into a single bucket. Really we gotta be taking the time and effort to split those up so that we have accurate job direct costs and accurate overhead costs so that we can.

bid more accurately and then also you know I think a lot of this classification helps us with our cash flow if we know what our overhead costs are and those are typically pretty fixed you know that’s going to help us more accurately project our cash flow out into the future and especially during the slower like you know seasonal times you know for some of these clients it’s been real eye-opening for them to see that these are the costs that

I need to cover during the off season when all my crew is laid off, but I have office employees and things like that. I need cash to cover that and being able to split that out for them really helps kind of illustrate that.

Rishi Srivastava (05:11)
Yeah, splitting that you’re doing is so important, not just for bidding, but also for this kind of situation where office people are still there when the crews kind of laid off.

Cody Daniels (05:21)
Right.

Rishi Srivastava (05:22)
Walk us through your month-end in 48 hours checklist for construction. What’s mandatory versus nice to have to keep field and finance in sync?

Cody Daniels (05:36)
Yeah, I’ll start by saying that to do a true close of the books is probably for most contractors it’s not realistic to get that done in 48 hours, at least in my experience. There’s probably some, you know, larger contractors that have the technology and infrastructure to close their books pretty quickly. The types of clients that I’m dealing with are

you know, they’re smaller mom and pop type businesses. Most of them are using like a QuickBooks or, you know, some other kind of comparable software. And so, um, and for a lot of them, just to get the WIP schedule might take a couple of weeks, you know, aggregating that data, you know, checking in with the PMs to check on the status of jobs and things like that. So I would say for, in an ideal world within 48 hours, if you can at least get all your

transactions categorized and into the right buckets and then reconcile your cash and your credit card accounts. For a lot of small businesses, that’s going to give you the data you need to make a lot of decisions on. It’s not gonna be perfect, it’s not gonna be a full, you know, true financial statement, but that’s gonna get you to a point where you can make a lot of informed decisions. If you could get this done in 48 hours, what would be nice to have, I would say, is, you know, reconcile your loans, make sure that you’re reconciling those accounts.

as well. If you can get the WIP schedule updated and get the WIP adjustments posted to the financial statements, that would be great. And from there, you know, reviewing budget versus actual by job and, you know, maybe spot checking some, you know, some other categories within the financial statements, you know, checking in on your AR and your billings, checking in on AP to see where that stands. And, you know, if there’s any fixed assets, capex, things like that, again, kind of reconciling.

But for me, the types of clients that I’m working with, typically sub 10 million contractors, if we could at least get the categorization taken care of and the basic reconciliations within 48 hours, would put you ahead of lot of your competitors.

Rishi Srivastava (07:31)
If you could standardize one WIP schedule habit across every subcontractor you work with, what would it be and why?

Cody Daniels (07:32)
Hmm.

Yeah, that’s a really interesting question. And I’m going to come at this in a way that I think is going to be a little bit unique. My background is primarily on the tax side of accounting. And this definitely ties into tax planning and preparing accurate tax returns. I would create a standard format for numbering your jobs.

on your WIP schedule. And for me, that standard format is using the year that the job started as the first two digits of the number that you assigned to that job. So for example, your first job with 2026 would be 26-001. Your next job, 26-002. And the reason that I like including that start date in there is that’s what drives a lot of our

Tax planning decision making, that’s what really makes construction tax uniquely different from any other industry. If you have a job that starts in one tax year and finishes in the same tax year, the tax treatment of that job is going to be consistent with what you see applying to other businesses, whether it’s professional services, manufacturing, things like that, the tax treatment’s gonna be pretty consistent.

when you start to have jobs that span tax years is when the construction specific tax laws start to apply. So a job that starts in December and ends in January, even though it’s a two month job, it’s span tax years. And that’s when we have to start applying the really unique tax laws that are applicable to contractors is when we have those jobs that span tax years. So, for me as a tax guy, looking at a schedule of WIP knowing when the job started,

helps me to better analyze that job and think through creative tax planning opportunities there, determining when certain mandatory treatments are required versus exceptions to the general rule that we can apply and things like that. So yeah, it’s just kind of a little bit of a unique take on it, I guess, to sort of help with the tax planning. Because otherwise, I’m going to have to go through with the business owner or project manager, internal.

and get that information from them separately anyway. So this just sort of alleviates that interview process.

Rishi Srivastava (09:55)
Yeah, communicating information clearly is so valuable.

The next section here, is on taxes, planning, and advisory. For an owner adding a second crew and a new truck, what’s your high-level decision tree between bonus depreciation, Section 179, or straight line? And how do you explain the trade-offs without tax speak?

Cody Daniels (10:26)
Yeah, that’s another great question. And I guess before I get into that, I’ll just remind the folks listening what the kind of differences are there. know, bonus depreciation, and I’ll probably get a little bit into tax speak with this, but it’s hard not to. A bonus depreciation applies to asset purchases and allows you, under current tax law, to write off 100 % of that asset.

Section 179 is a formal election that you have to make on an asset by asset basis. So it differs from bonus depreciation and that bonus applies to all of your assets by default. You would have to choose to elect out of bonus depreciation. Section 179 is a little bit different in that you have to affirmatively elect it on individual assets. And then straight line is exactly that. I mean, you take…

the tax life of the asset, be that five years, seven years, and you divide that among the cost of the asset and you take an even amount over that time. So for me to analyze what of those options makes the most sense, the first question I’m going to ask is, do we need the tax deduction this year? And that may be a tax planning decision, but it’s also frequently a

business decision. So I’ll give you an example. Working with a construction client, their priority throughout all of our kind of initial discovery meetings and onboarding meetings has been minimizing taxes. That’s been a big priority for them. But we get into our year-end tax planning meetings and we include their banker in one of the meetings. And he says, guys, we can’t show a loss for tax purposes.

looking to get some SBA financing next year for a building that they’re looking to have constructed. And we need to show taxable income on the tax return in order for this financing to go through the way you want it to. So now, instead of looking to maximize tax deductions, we’re looking to be strategic to minimize taxable income.

but ultimately still show some taxable income on the tax return. So the SBA is satisfied and can work with them on the financing that they need. So question one is like, do we need the deduction this year or is this something that we can choose to not maximize our tax deductions and maybe push some of that into the future? Along with that is kind of an analysis of just where they’re at.

currently and whether or not they’ll get the benefits of those deductions. So one of the differences between bonus depreciation for Section 179 is that bonus depreciation can create a loss for tax purposes, but Section 179 can only drive our income down to zero. Like it’ll max out at zero break even taxable income. you know, trying to balance the benefits there. If we create a loss for tax purposes, do we have other sources of income that we can offset?

Rishi Srivastava (13:10)
Thanks.

Cody Daniels (13:21)
versus 179, we know we’re going to be capped at zero. The benefit of something like Section 179 is that from a state tax perspective, more states follow the federal Section 179 rules than follow the federal bonus rules. So again, optimizing between federal and state tax liabilities becomes important, while bonus may be hugely beneficial from a federal standpoint because it can drive our income into a negative.

If we have to add back all those deductions at the state level, then we end up with potentially a large disparity. end up owing significant state taxes, maybe something like a section 179 where the state might comply becomes a little bit more of un appealing decision right there. So yeah, there’s a lot of factors that go into it it’s really just kind of determining what’s important for the client and what’s going to get them the right answer in the current year.

Rishi Srivastava (14:15)
Yeah, know, tax planning, if you are strategic about it, it also gets super complicated.

Cody Daniels (14:22)
It’s yeah, it’s it’s one of those things where it’s hard to give a good answer to a wide audience because everybody’s situation is unique. mean, every tax situation so so specific and what works for one taxpayer may not work for another. And so that’s really why you do have to invest the time and going through it and.

Rishi Srivastava (14:31)
Yeah, yeah.

Cody Daniels (14:43)
you know, using, you know, like search engines or like even like a chat GPT or something, you know, it’s, it’s probably going to overlook the nuance or the idiosyncrasy of your specific situation. And that’s where bringing in an expert kind of, you know, helps tie everything together so that you’re making informed decisions.

Rishi Srivastava (14:59)
Yeah, AI is only as good as the expert who it is reporting to.

Cody Daniels (15:05)
That’s right.

Rishi Srivastava (15:05)
Cost segregation comes up a lot in our audience. What’s a quick litmus test to know when it’s worth pursuing on yards, offices, or mixed use build outs?

Cody Daniels (15:20)
Yeah, so it used to be the cost of the property was really kind of one of the driving factors there. And you had to probably be over a million dollars in purchase price on the building for it to make sense. you know, things have started to change in terms of, you know, our ability to execute on cost segregation study projects, as well as just, again, the tax environment that we’re in right now.

You know, in July of 2025, we had the One Big Beautiful Bill Act that was passed and that brought back into the full 100 % bonus depreciation. And with 100 % bonus depreciation, for me, all buildings are at least worth considering a cost segregation study on now if you’re going to hold the building, you know, for at least a decent amount of time. So for me now, the litmus test is not really the cost. It’s really how long are you going to hang on to

building. you’re somebody that’s, know, flipping buildings pretty quick, you accelerate a bunch of tax deductions into year one, but you sell in year three and recapture all those, all those tax deductions. It really didn’t benefit you all that much to have done the cost segregation study. But if you’re going to hold on to it for, you know, five, 10, 15, maybe even longer, you’re really going to get the benefits there because you’re front loading.

up to I would say 20 to 40 percent of the the purchase property could be written off in year one. You’re front loading those deductions and you’re getting to hold on to those tax dollars for a longer period of time before you start to recapture on the date of the sale. And that really is for me when when the analysis becomes like pretty obvious that it’s like yes we should move forward with this. If you’re going to hang on to it for any more than five years it’s probably worth it

But even low dollar properties now, mean, we’re able to do cost segregation on, you know, 250, $300,000 properties. I literally just did one on $125,000 property and we’re able to do these in a manner that it works for anybody.

Rishi Srivastava (17:23)
What’s the most overlooked entity structure or owner comp tweak that improves after-tax cash for small contractors without adding complexity?

Cody Daniels (17:38)
Yeah, I guess I’ll start by saying that, you know, complexity is all relative. So what’s complicated for one business may not be complicated for another business. So, you know, let’s say you’re a startup contractor, you know, one guy in a truck out there doing all the work on your own, setting up payroll under like an S-Corp structure, that’s going to add a lot of complexity for you.

it may be beneficial to retain that sole proprietorship schedule C business structure for a little while to keep your compliance costs down, to keep the complexity down. consider that S-corp election when the business starts to grow, you have more profitability, maybe you start to take on some employees. somebody is already using that S-corporation structure,

taking the steps to really dive deep into your owner compensation is much less complicated at that point, because you’re already paying yourself payroll. You’re already filing payroll tax returns and things like that. I think if you’re at that stage, working through like a reasonable compensation analysis, you know, to make sure that you’re paying yourself a compensation that

can be defended in front of the IRS as reasonable, but you’re not overpaying in compensation can be a really smart strategy to minimizing your overall tax liability. The play there is obviously minimizing payroll taxes, social security and Medicare and things like that. But certainly digging into that can be very beneficial and kind of to piggyback on that because I’ve done this S corporation analysis for a couple of clients this year.

It’s not just the savings on the payroll taxes that factors into this. There’s this optimization of the qualified business income deduction. Some people call that 199 cap a and what that is, it’s a 20 % deduction of any flow through taxable income to a business owner via like a K one. Or again, if you’re a sole proprietor ship your business income.

So it’s an opportunity to exclude up to 20 % of your business income, but it’s subject to limitations. And one of those limitations is your total wages that are paid out. So for certain businesses that may have relatively low payroll, paying yourself some additional compensation can help you to get more of this free 20 % deduction.

And so optimizing between the payroll taxes and this 20 % income exclusion becomes a little bit more of a nuanced analysis that we can go through for clients and kind of determine what makes sense there. Because with this 20 % deduction, it may not make sense to drive your wages as low as you reasonably can. It may make sense to pay yourself some wages to try to optimize that deduction.

Another area that I think is worth looking at and maybe more broadly applicable from like a compensation structure is just making sure you’re considering retirement planning as part of your tax planning. So the conversation I have with contractors all the time is, well, should I go buy a truck before the end of the year to help minimize my taxes? And while if you need a truck, that’s a

potentially great strategy to go out and spend 50 grand on a truck and you can finance it so maybe you’re not coming out of pocket 50 grand, you’re kind of spreading out the actual cash outlay there to accelerate that $50,000 deduction. And something that I think is worth considering is, well, what if I put that $50,000 in a retirement plan for myself? I’m still getting a $50,000 tax deduction on my current year tax return, but instead of paying.

ford dealership or whatever kind of equipment dealership you’re buying fixed assets from, 50 grand, you’re now paying your future self 50 grand. And so you’re still getting the same tax deduction, but who gets to retain the money in that situation? You’re paying yourself in that situation. And so that’s something I’ve started to try to sell more clients on is if you need the truck, yeah, let’s talk about buying the truck. But if you don’t need the truck, like…

Let’s put some money away for our future self while still minimizing our current year taxes.

Rishi Srivastava (21:55)
Yeah.

The next question is, suppose a contractor is scaling from $5 million to $15 million. What quarterly tax planning rhythm do you set so year end isn’t a panic?

Cody Daniels (22:10)
Yeah. So I think for me, quarterly tax planning can be challenging in the construction space because it’s a very, up and down and seasonal, type of industry. so for Q1, it’s, you know, let’s get our prior year tax return in order, because that’s going to be our starting point for planning for, for the upcoming year. So if we can get our tax return done in Q1, great. If we can’t.

let’s get everything that we have together to make as educated a guess as possible what our taxable income is going to be and then put our tax return on extension. And then based on either the final tax return that we filed or the like draft of our tax return that we use to extend, we should have a decent idea of what our tax liability for the prior year is. And that’s always our starting point for estimated tax payments.

So there are a couple different ways that you can determine your estimated tax payments throughout the year and pay those in to ensure you’re not subject to additional penalties. You can calculate your income every quarter and pay in based off of that, or you can use your prior year tax liability as a safe harbor. So you can take your prior year tax liability, for most taxpayers, you’re take it times 110%. So if you owed 100,

thousand dollars in taxes last year, take it times 110, so your estimate’s going to be 110,000 dollars and start to pay in quarterly based off of that. So, you know, for a lot of clients early in the season, know, Q1, we’re very optimistic the year’s going to turn out good. Even if Q1 starts out kind of slow, we’re still feeling optimistic. It’s early in the year. We know that we’re going to, you know, pick up and we’re going to, you know, continue our growth projection and all that. So,

For most clients, unless they had some extraordinary event that caused their tax liability to spike in the previous year, we’re gonna use that safe harbor methodology and start paying an estimated taxes based off 110 % of last year. Once we get into Q2, we may start to do some more in-depth planning, but we’re still pretty early in the year. So it’s typically like a mid-year check-in. We’re looking out for, again, like,

Big ticket transactions that are kind of unique, you maybe we sold a building and we have a big capital gain from that, or we have some investments that are doing really well and we start to sell those off or, you know, just looking out for those, those kinds of unique items and planning around those. Maybe you bought a building and we’re to do a cost seg on it and then we’re going to use, you know, those accelerated depreciation deductions to help minimize things. So, you know, we’re starting to look at things there, but we’re probably not deviating too much from that.

that kind of safe harbor estimate that we put together early in the year. Q3 is really, for me, when it starts to get fun, we have pretty good data at that point in the year, and we can start to really kind of do some earnest projecting and forecasting through to the end of the year. And that’s where we can start adjusting payments if things are shaping up differently. If our income is trending higher, we just stay on that safe harbor path.

because what that allows us to do is pay in based on a lower tax liability. And there’s no requirement if our income, you know, in a given year is significantly higher than the previous year to pay in that extra early. We don’t have to do that. So let’s keep the cash in the business. And, you know, if the year turns out well, we owe that tax early in the following year. But if the year is trending not so good at that point in Q3, then we can start to scale back our estimates based on what we’ve paid in earlier.

And at that point we have again, you know, some strategies that we’re probably looking to implement. You know, we’re probably starting to look at, should we buy equipment? You know, are there some credits that we should be going after? If we’re utilizing the cash method as the vast majority of small contractors are, like, what are we looking to do from that perspective? Are we looking to pay down payables to accelerate the tax deductions? Is that not necessary? So those are the conversations we’re starting to have in Q3.

And then Q4 is typically refining, know, we’re updating for our year to date financials. You know, we’re again, revisiting those earlier Q3 conversations and we’re looking for those, you know, again, kind of final action items that we want to tick off before the end of the year. As far as again, paying things down, buying equipment, et cetera.

Rishi Srivastava (26:30)
Actually, on my personal tax return, this is the first time I got a penalty because of estimated tax. I always ignored the estimated tax stuff. I’m like, whatever. Who cares? It’s an estimated tax thing.

Cody Daniels (26:39)
Yeah.

Well, it’s, you know, it’s one of those things that historically it had been pretty cheap to quote unquote borrow from the government. So it had been relatively cheap in years prior to forego estimated tax payments, keep that cash in the business and then figure it out closer to the end of the year because it’s expensive to go borrow money from the bank and, you know, manage the cash flow and all that. And, you know, for most small businesses, taxes are, they’re a

sizable expense if you’re running a profitable business. So again, historical rates, was cheap to do that. Now, interest rates that the IRS are charging are starting to go up, they’re starting to charge greater penalty rates and now it is more of a meaningful decision to start to look at that. And that’s one of the hardest things I see for new construction companies. Somebody that’s jumping from their W-2 job over to entrepreneurship and

you know, they’re not paying their taxes through withholding like they used to as an employee. so, you know, that becomes a surprise at the end of the year. It’s like, I haven’t been paying taxes and, know, now what do I do? So, yeah, that’s, you know, that’s why we’re monitoring this. is tax planning is not a once a year thing. It’s a thing that you should be doing throughout the year. And, you know, if last tax year didn’t go

the way you wanted it to, starting as soon as you can for this coming tax year is really important because a lot of these decisions are timely. If you want to change your entity structure, there’s certain time that you really should be filing those elections to change your entity structure and things like that. So it’s very easy for your CPAs and your tax professionals to help you on the front end when the writing’s on the wall and things are set in stone after the fact, our hands are.

are tied in a lot of cases, it’s much more difficult to execute on some of the fun and creative strategies that we know are available. We just got to be doing that, you know, timely.

Rishi Srivastava (28:35)
Yeah. The next section here is on growth, marketing, and the builders CFO lens. You’ve been building a focused construction practice. What referral flywheel has actually worked? Bankers, bonding, payroll, attorneys, and how can a contractor tap the same network to improve financing terms?

Cody Daniels (29:00)
Yeah, so for me, I’m going to give you the surprise answer first, and then I’ll get into, I think, more the maybe traditional or expected answer to that question. I have surprisingly got a decent amount of leads from other CPAs, which I think might shock some people out there. But I think there’s some change happening within my profession, within the accounting industry.

Rishi Srivastava (29:18)
Later.

Cody Daniels (29:30)
where there’s a lot of work to go around and not a lot of supply to execute on the work. So I think firms are becoming a lot more collaborative in that they’re recognizing not every client is a good fit for them. So let’s make an introduction to somebody that can service them well. There’s a lot more, I think, specialization happening at smaller firms like mine.

where we realized that again, we want to serve a specific sort of client profile and things that fall outside that we can refer to somebody else that we know is going to take care of them. So that’s been a surprisingly beneficial kind of relationships to cultivate or referral community to cultivate as the other CPAs. Not everybody wants to work with contractors, which I don’t get, you know, but you know, for whatever reason, some CPAs, they want to work with other industries and

They’re happy to pass the contractors along over to me. So so that’s the surprise answer that the more traditional answer. Obviously referrals from existing construction clients are huge. Other professional services and folks serving the construction industry, bonding agents and bankers have been have been really good for me because they can spot some accounting problems before maybe the business owner realizes it. So if you’re

you know, presenting your financial statements to get a line of credit or to get bonded. You know, those people are going to look at the financials, they’re going to look at your tax return and they’re going to start to notice that, you know, things maybe aren’t is in as good a shape as they can be or that, you know, maybe there’s things that don’t make sense there. What do mean your account’s not preparing a schedule of WIP for you and they’re not booking the WIP adjustments? Like you don’t have true percentage of completion financial statements.

And that’s what the bankers and the bonding agents want to see. they’ve been really good, really good resources for me because they can spot those problems kind of early on in the process. And they know that construction is a very nuanced industry and you need to be working with somebody that has expertise in that industry in order to produce the financials and the tax returns in the way that those users want to see them.

I guess as far as how can contractors, you know, tap into the same network. It’s kind of like what I said earlier that, you know, not every CPA firm is a good fit for a contractor. Well, it’s the same thing with like banks, right? Not every bank knows the construction industry well. And so they’re not necessarily going to take chances on an industry that they don’t understand well. They may still loan on it, but the terms may not be as favorable and they may not.

give you the capacity that you need and things like that. So what I’ve found throughout my career is that once you have the relationship with the client as a CPA, you become really their go-to person for making introductions to other areas. Like I feel like we become kind of the quarterback. And when it’s an insurance question, we get those. When it’s an HR question, we get those. When it’s legal, those come our way too. And it’s like, well, guys, that’s not my.

area of expertise, but I know a person that I can introduce you to. that becomes really, I think, important for us to have those established networks so that when a need for a client does come up, you can introduce them to the right person. And it should be somebody that shares that construction background and expertise so that they can, again, properly serve them.

Rishi Srivastava (32:46)
Yeah. When do you advise owners to hire their first controller or in-house accountant? What signals tell you it’s time? And what’s the job scorecard?

Cody Daniels (32:59)
Yeah, so, yeah, it’s gonna vary a little bit based on, I think, the contractor and maybe what some of the owner’s capabilities are.

you know, really kind of how quickly they’re growing and all that. I’ll jump to the in-house accountant first. I think for most contractors, that’s going to be a pretty early hire. You know, obviously when you’re starting out, if you’re a solo kind of business owner, you’re going to be doing everything. I mean, you’re going to be doing all the billing. You’re going to be reconciling quick books. You’re going to be paying the bills. But I think bringing somebody in-house to own at a minimum the receivables and payables functions.

is really important for small construction businesses. I think it’s hard to outsource that. I know in other industries, outsourcing billings and bill pay is not uncommon. I think for construction, it’s very hard because you got to have sort of that institutional knowledge about the business. You know, and you got to have direct communication with the people managing the jobs to know like, can I actually bill for this? When can I bill for this?

you know, what vendors do we need to make sure, you know, we’re getting paid right away and what vendors can maybe we take a little bit more time to pay. I think there’s a lot of subtlety to it from a construction perspective. I think as soon as the business owner starts to feel overwhelmed by, you know, kind of those administrative accounting tasks is when they should look to bring somebody in, even if it’s part time to start before it grows into a full time role. And most of the clients I work with

that person is, you know, they have other responsibilities, you know, under their job title within the office. mean, they’re, probably handling payroll too. you know, they’re handling a lot of kind of phone calls as far as, know, like light sales and business development things and managing the office and all that. So, I think that’s very early, in, the business’s life. You’re looking to do that. controller I think is going to.

really depend on how you as a business owner

view the financial statements and kind of your opinions around the data that you’re getting out of the financial statements. I don’t know that I’ve seen very many contractors under five million have anybody in that capacity. And even beyond that, it’s pretty hit or miss to me whether they start to bring in somebody in a controller capacity. think they typically got that internal person that’s handling like day-to-day accounting things.

they may start to outsource some of the monthly closed process and things like that to a CPA or like a fractional controller type firm. I would say at five million, it might be worth considering bringing somebody in house. But again, it’s gonna vary. If you do bring somebody in house, what I think that person should be responsible for is obviously owning the whole month end closed process, maintaining an accurate schedule of WIP

and making sure that’s updated on a monthly basis. And then, you know, probably doing some level of like cashflow forecasting that starts to get into a bit of a CFO type responsibility. But I think, you know, most controllers, full-time controllers can handle things like that too.

Rishi Srivastava (36:01)
Yeah. The number 5 million, that’s something people can easily remember.

Cody Daniels (36:07)
Yeah. And again, it’s going to vary. I’ve seen $10 million contractors that don’t have a true controller in place. it’s, really, yeah, I don’t know. think it really boils down to the business owner and again, how comfortable they are with the financials and their mindset around the money. Like there are a lot of contractors that are kind of shoot from the hip type of people and they’re really not relying on the financials for much. They’re

Rishi Srivastava (36:13)
Mmm.

Cody Daniels (36:31)
at cash in the bank and making decisions based off of that. That’s not what I would advise anybody to do, obviously. I I think there’s a lot of meaningful data points you can get from the financials I think you want to make informed decisions, but I think it’s still an industry where there’s a lot of people working off of their gut and not necessarily relying on the data.

Rishi Srivastava (36:52)
Yeah. If you had to pick one KPI dashboard tile each for the owner, PM, and AP lead, what would those three tiles be and why?

Cody Daniels (37:04)
Yeah, so for the owner, think I would encourage them to have a real good handle on cash flow. So I think I don’t know if it’s a KPI so much as I think, you know, they really need to be in tune with the cash flow forecast and where your net cash position is, because there’s elements that go along with maintaining cash flow for the business that really the owner is going to have to be involved.

I mean, increases to the line of credit, draws on the line of credit. know, in a lot of cases, the owner calls up a customer and says, hey, I need to get paid right away or we’re going to, you know, whatever the consequences, that’s going to carry a lot more weight than maybe your, you know, your AR person or, you know, somebody else making that phone call. So I think kind of net cash position relative to the cashflow forecast.

is something I think that an owner should have a lot of responsibility over. PM, I think it’s going to be kind of job profitability compared to our budget or our bid. I think really that’s their job is to make sure we’re executing on the job and that we’re maintaining profitability there. They’re going to be responsible for the crew and making sure that the crew is getting through things efficiently. They’re going to be responsible for

you know, the materials and making sure that, you know, we’re purchasing things and, you know, staying on top of that. And then the third one was AP lead. I would say, yeah, really just, you know, kind of day’s payable outstanding is, you know, key financial ratio that you’re going to look at there and, you know, just evaluating again, are we paying our vendors strategically?

It’s not something that we need to be, we don’t need to pay bills as soon as they come in the door, right? They give us payment terms for a reason and we need to take advantage of the payment terms that we have available to us to maintain cash flow. But at the flip side, mean, you don’t want to slow pay too much, otherwise your vendors are going to be unhappy with you. so maintaining that balance of not expending cash too much earlier than we need to, but keeping the relationships.

in shape is important.

Rishi Srivastava (39:12)
Yeah. The next section here is on tools, workflow, and real world scenarios. A PM says, I can’t find the invoice image from three months ago. What’s your ideal source of truth setup? AP tool, ERP, file policy. So that never stalls a job meeting again.

Cody Daniels (39:36)
Yeah, I mean, it’s funny because again, it’s kind of what is the ideal scenario versus what are people actually doing in practice? And I have been working with a number of my contractor clients over the last six to nine months to just get them in the habit of maintaining accurate payables information. And it usually starts kind of in client onboarding to say like,

I see your receivables balance is here and your payables is significantly lower. What’s the deal there? And it’s like, we’re not really recording bills in the accounting software. so training them up on like, okay, this is the process. We got to get the bills entered in there. We can’t do any cashflow forecasting without it. And how are you guys even maintaining any sort of process for keeping track of who’s getting paid and when?

typically off balance sheet and there’s a file and the person goes through it weekly and kind of checks in on things and pays things as money comes in the door. so I think that’s the reality of the situation for a lot of contractors is they don’t necessarily have a good process. I would say ideally, I think you should be at a minimum using your accounting system to record the bills and

really depending on the quantity of bills that you have coming through. you’re somebody that has dozens or hundreds of bills coming through in a month, you probably need to be using an AP tool and those things need to interface with each other and communicate. So, ideally, the invoices work their way into the accounting system in some fashion, whether it’s directly working through the…

the bill process or the module within the accounting software or using an external bill pay platform and it all kind of imports and links over. So I think the worst case scenario is obviously we have some physical paper file sitting somewhere or is sitting in somebody’s email and we just have flags and an email folder where things go and then they get moved out of there as they’re paid.

You really do need to have some process that links it into the accounting system so that whoever needs to access that information can access it. Whether it’s the business owner, whether it’s like an internal AP clerk, bookkeeper, whatever, it needs to exist within the financial statements.

Rishi Srivastava (41:56)
Yeah. You get a set of books from a new client. Jobs look profitable, but cash is always thin. What’s your forensic checklist to reconcile WIP, AR aging, retention, and underwilling?

Cody Daniels (42:05)
Ahem.

Yeah, so, I mean, probably going to start with the WIP schedule and see if that’s being maintained first off. Again, you know, the reality of the situation is that there a of small contractors that are not updating their WIP schedule on a consistent monthly basis. And that’s really a habit that we should be adopting. And then if they are doing that, again, are they updating the financial statements for that? Most

Small contractors are not using like a robust construction specific, you know, accounting software or ERP, you know, type platform. They’re, you know, a lot of ’em running QuickBooks and the WIP schedule is in Excel separate of that. Again, at least with a lot of the businesses that I’m working with. And so they’re going to have to be manually via journal entries updating that. And so I think we’re starting there. looking at WIP. We’re making sure it’s being updated, you know, within the financial statements.

And, you know, from there, I guess we’re probably moving into AR and looking at, again, are we billing when we’re supposed to be billing? Are we under billed based on what the WIP schedule is telling us? you know, are we hopefully in an over billed situation, but making sure that we’re billing as soon as we’re allowed to based on the terms of our contract. And again, we’re separating within our accounting software, like the retainage.

from like the regular billing because we want to know, okay, if we we bill for this much, how much are we realistically likely to collect in the short term versus what is going to sit in retainage and it may take us potentially longer to get that collected. So I think that’s kind of would be my process is start with the WIP and then sort of work into the financials and then drill down into the aging.

You know, things like that.

Rishi Srivastava (43:55)
is so important.

Play Fix this in 5 minutes. You open a PNL where materials is 60 % higher than bid across multiple jobs. What three clicks do you make first?

Cody Daniels (44:12)
Yeah, I like this question a lot. I mean, I think for me, I’m gonna just start by drilling into the detail on the materials and we’re gonna see are things being duplicated within the accounting software? Are we manually entering like a payable in there and then it’s also importing from some other source? I mean, like you would be shocked like how often duplication of any type.

Rishi Srivastava (44:25)
Mmm.

Cody Daniels (44:37)
within accounting software. I mean, it could be on the AP front. I see it happening with payroll. I see mapping from an external software into our accounting software that causes things to import. then again, somebody’s manually entering things like that and they’re not matching the transactions up. So a duplication to me would be where I would start. think it’s…

the old KISS acronym, keep it simple, stupid, Where like, let’s try to focus on the most obvious solution and not overanalyze this. And I think duplication is where, you know, we’re gonna potentially solve some problems there. From there, I would, you know, maybe start to see if things are being coded to the wrong job. You know, maybe we have jobs where,

materials are overstated, but then we have other jobs where there are very minimal materials recorded because we’re not correctly coding things between the two different jobs. And I see this happen again, small contractors, they buy materials for multiple jobs on one invoice. That single invoice gets coded to one of the jobs rather than splitting it up between all of the jobs where we’re using those different materials. So let’s make sure we don’t have jobs where our materials are understated.

And then if again, if we’re kind of working through the most simple explanations, if neither of those are going to, you know, really help us, I think then we start to kind of, you know, drill down into if it’s not like an accounting error or, you know, some sort of system problem, you know, what what’s happening with our purchasing? Like, did we make a mistake in our our bidding? Like, did we?

somewhere along the process, fat finger something in the software? Do we fail to select something in the software and our bid is way off? Or what’s kind of happening there? Kind of drill down into like, are these prices right? Did we misquote something? Was there a change order that got missed? I think that’s another big one where we originally set out to do this and then we have the change order and the change order is not getting passed along to

know, the accounting team or the, you know, the in office team. And so we’re not accounting for these, you know, things that are happening. The people in the field know what’s going on, but the people maintaining the records don’t.

Rishi Srivastava (46:50)
Yeah, really liked the flow you described.

Cody Daniels (46:53)
Thank you.

Rishi Srivastava (46:53)
The last section here is entertainment and personality.

tax code or tool belt, lightning round. Tell us which you’d rather tackle and why. Negotiating with an auditor, explaining WIP to a banker, or spending a day with a superintendent, walking the site and tagging cost codes on the fly.

Cody Daniels (47:19)
Yeah, well, it’s definitely not negotiating with an auditor. That would definitely be the bottom of the list for me for sure. For me, yeah, out of those choices, I would love to walk the job site more frequently. I would love to get out from behind a computer as somebody that sits at a desk most of the time. Any chance I have to get out there and kind of see what my clients are doing in real life, like out there on site.

I think is very cool. That’s part of why I love the cost segregation service line that we have, because you can get out there and you can walk through the buildings and you can kind of see how the different businesses are operating and just sort of the internal workings and all that. So yeah, for me, getting out there and walking the job site would be a real fun experience. Part of why I got into servicing construction as a CPA,

is my family comes from construction. I had a grandpa that was a union carpenter for probably 25, 30 years. My other grandpa was a welder and I got uncles that work in the industry. One’s a road builder. One worked in plumbing and electrical. I have a cousin that does HVAC now. So I have a lot of family that’s in the trades and they’re out there and working in the elements and I get to sit in a nice climate controlled office.

sitting in front of a computer. so for me to get out there and really kind of see how my clients are operating on a day in and day out basis would be a…

Rishi Srivastava (48:41)
What about explaining WIP to a banker?

Cody Daniels (48:44)
Yeah, well, it’s funny that you mentioned that. I had coffee with a banker a couple months ago and he was pitching to me that one of the things that really kind of sets his bank apart from other banks is they got their start in the construction industry and he feels like their team has a really good handle on construction accounting and they can look at a WIP and they can make informed decisions from that.

And so, yeah, I don’t know. I think that would be a fun experience, too. I love just talking about accounting and tax for this industry. so to get to kind of dive into that deep with folks that have a financial background but maybe aren’t in the weeds in quite the same way that, you know, like I’m in the weeds on a regular basis, I think that could be really fun because it’s you can kind of nerd out.

some of that stuff and you can really kind of get into the nitty-gritty of it and yeah I think that’d be a great time as well.

Rishi Srivastava (49:45)
Thank you for coming on to the show. I had a good conversation with you.

Cody Daniels (49:49)
Yeah, thank you very much, Rishi. Yeah, happy to have had the opportunity.