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What is cash flow?
Cash flow is the movement of cash into and out of a business, like a construction company. Positive cash flow means that more money is coming into a business than is going out — sales and revenue are outpacing expenses. Negative cash flow means that more money is going out than coming in.
What are common cash flow issues in construction?
Every business is different, but many construction companies face some of the same cash flow issues due to the nature of their business. Some of the most common challenges that may impact construction companies' positive cash flow include:
- Inaccurate project bidding: Most construction projects include a long list of expenses, including a wide variety of types of supplies and labor from a number of different tradespeople or subcontractors. Assembling an accurate quote before beginning construction is crucial but challenging. Surprise expenses are common and can lead to cash flow issues.
- Delayed payments: Most small construction companies rely on regular customer payments to keep cash flowing as they must continually pay for labor and supplies. When customers don't pay on time, that can quickly have a negative effect on cash flow.
- Seasonality: The season and the weather can affect a construction company's production, as well as demandfor its services. During slower times of the year, a construction company may not have as much cash inflow but may still have much of the same cash outflow to cover overhead and other costs.
- Payroll: For many businesses, payroll is the largest consistent expense, and this is true for most construction companies. Even when sales and revenue are down, payroll expenses continue, which may have a negative impact on cash flow.
- Change orders: After a construction project has begun, it's common for the customer to expand the project scope or request other changes throughout the project. To keep customers happy, a construction company may need to be flexible with change orders — but they can present cash flow challenges.
How do you manage cash flow in construction?
There are a number of strategies to improve cash flow management in construction. Consider these nine tactics:
1. Setting up the right accounting practices
An important step to consider in managing cash flow in construction is to set up appropriate accounting practices. Construction company owners may want to consider:
- Implementing a system for accurately tracking employee and contractor hours.
- Keeping an accurate inventory of all materials and tools to cut down on wasted expenses.
- Checking financial records regularly.
Be sure to consult an accounting professional to get advice that is tailored to your business.
2. Using a cash flow statement for forecasting
A cash flow statement is a financial document that shows the cash entering and leaving the company. A business may use a cash flow statement to forecast projected cash flow, helping to more accurately plan and budget for the future. Small business accounting software programs can automatically generate a cash flow statement for your business based on the financial information you input into the software program.
Business owners can also consult a professional to help determine their cash flow and assist them with preparing other financial statements.
3. Negotiating with vendors and subcontractors
Construction companies could make changes to their available cash flow by negotiating with the suppliers and subcontractors that work with them. In addition to negotiating for a fair or discounted price, they may also negotiate payment terms. For example, if vendors agree to receive payments in 60 days rather than 30 days, this could help a company better manage cash flow.
4. Invoicing regularly
Customers are unlikely to pay a construction company until they receive an invoice. While many small business owners delay sending invoices because they're busy doing other tasks, it's important to send invoices promptly to ensure that cash flow will meet projections. In addition to sending prompt invoices, businesses may want to regularly revisit outstanding invoices and send reminders as needed.
5. Offering multiple payment options
When a construction company offers customers various options for making payments, they may avoid potential roadblocks to getting paid. For example, different customers prefer to pay in different ways, such as cash, check, credit card, or online payment. Accepting asmany forms of payment as possible may make it easier for customers to pay their bills.
6. Incentivizing early payments
Consider providing a discount or other incentive for customers who make early payments. When customers pay early to get the discount, those funds may help alleviate potential cash flow issues.
7. Penalizing late payments
If agreed to with customer in the advance, some construction companies may encourage on-time payments by assessing a fee or charge on late payments.
This can help the construction company to reduce cash flow shortfalls due to late or missed payments. Talk to your attorney to understand applicable limits on these fees.
8. Managing projects to stick to reasonable timelines
When construction projects get off schedule or spiral beyond the original scope, costs can skyrocket. Project management may help avoid delayed work, helping construction companies stick to agreed-upon timelines and avoid paying extra overhead costs for projects that should have been completed earlier.
9. Financing fixed assets
When cash flow is tight, it may be difficult for construction company owners to purchase needed equipment like boom lifts or finance the replacement of the tools they use during their day-to-day. These fixed assets, or assets that are purchased for long-term usage, could be financed with a construction loan.
While these tips could help construction business owners to keep their businesses thriving, it’s important for any small business owner to remember to consult a professional when it comes to determining or making decisions around their business’ financial health.
The material made available for you on this website is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax andfinancial advisors.
