Abstract
It has often been said that "Cash is the lifeblood of any organization." This statement is especially true for the Construction industry when subcontractor payments often do not follow general trade payable schedules. Because of this, more cash on hand is necessary for successfully performing the contracted work. A. Teichert & Son is a very conservative, cash rich company. It has come up with a system to reward a healthy and positive cash flow and aggressive collection and billing efforts by Construction and Materials. When inventory and retention are held and the accounts receivable balance ages, money and other resources are tied up. A company with limited cash reserves would have to borrow money to cover expenses. Companies that are cash healthy may instead choose to assess a "charge" to revenue producing business units. This charge is calculated at the administrative or corporate (non-revenue producing) level and is allocated to revenue producing business units or companies based on their changes in A/R, changes in inventory, changes in retention, and change in work in progress. This charge is meant to encourage revenue producing business units to collect aging accounts receivable, bill clients aggressively, reduce inventory, and release retention on jobs (when appropriate). Problems with this carry charge include quantifying the opportunity cost (or the return on investment that could be achieved had the cash been available), making this charge relevant to a service organization (such as a construction division) as well as a manufacturing division where inventory is more easily quantified, and gaining employee buy-in for a "pretend" charge that ends up being eliminated at year end. Sources of data used in this analysis include Construction trade journals, academic journals, newspapers, magazines, internet sources, and several interviews conducted with employees working in the Construction and Materials Manufacturing industries. While one size does not fit all when calculating a cost of carry, the basic factors that should be considered if doing so are the opportunity cost or the cost of capital, the company's overall cash position, extra work that is required in calculating this charge, and the challenge of rolling out a new process to an organization.