How to Best Manage Cash Flow in Your Construction Business
How to Best Manage Cash Flow in Your Construction Business

How to Best Manage Cash Flow in Your Construction Business

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So how many times have you already heard the quote saying “Cash is King”? You’ve heard it many times and mainly because it’s very accurate. Maintaining a stable cash flow in the industry is crucial for a particular project to be successful. So if your company is consistently operating at a loss and usually suffers from negative cash flow, it may be doomed to fail.

Generating positive cash flow per month can be the solution for this issue because payments can be made on time and never affect other aspects of the business. It’s your job to prioritize expenses and income all at once, but that’s a broader statement.

In this blog, learn what cash flow is, how you can best manage it, and why construction scheduling software is much better than spreadsheets when it comes to cash flow management.

What is Cash Flow in Construction?

 

Cash flow is one of the essential measurements in a business. So it goes to show that your construction business’s wallet is cash flow. So when you’re tracking your company’s cash flow, you’re mapping out when will cash comes in and goes out and how much. The essential timing of these transactions can significantly affect the financial standing of your business at any given time.

A cash flow report can show you how much money you have on hand at a given time. A contractor’s cash flow statement is defined as an analysis of the cash that usually came in and went out for a specific time, typically in one month. This period can either be in the past or a projection for the future.

In some cases, cash flow can be an issue in the construction supply chain. If you don’t have enough positive cash flow, the continuous lack of funds may cause your project. So here are common cash flow issues within construction:

  • Failing to set up a payment schedule or initial payment even before starting to work
  • Taking many projects and also overshooting cash capacity
  • Failing to fund an entire project due to either late or nonpayment
  • Not tracking or mismanaging change orders

Such issues occur now and then, mainly when you use outdated software tools to manage and track your cash flow. For example, tools like spreadsheets are limited in terms of cash flow analysis. They often create the need for manual processes to break down to individual records to monitor things like change orders. 

Ways Your Construction Business Can Manage Cash Flow Much Better

 

Let’s take a closer look at some practical ways you can improve your construction company’s cash flow. The most amazing this about the list below is that all strategies can be done by yourself. They don’t even require changing your client’s payment habits.

1. Establish financial practices

Every business needs accurate financial statements and the correct accounting reports to determine where the cash flow is good and what areas need support. Because after all, you cannot even manage what you don’t measure. Your business has to understand how much money it has in the bank. You should also need to determine how each project affected your cash position overall quickly.

Tracking cash flow is simply about good record-keeping. Today, project management in construction and advanced software tools can quickly produce reports instantly, helping you to get more into details.

2. Negotiate better payment terms

Talk to your suppliers, especially on how to get the best offer on the construction materials you need. It may include purchasing in larger quantities or changing suppliers to get much fairer pricing. Ensure you are getting the best payment terms and best prices from all your suppliers. Your terms with your suppliers must ideally be equal to or longer compare to the terms you give to your clients. 

3. Invoice regularly or promptly

Make sure you have a working system for sending out payment applications regularly. Make sure also to avoid delays in payment by correctly following the billing schedule closely. Get a confirmation that those invoices have been received, follow up a week after sending them to see if there are any issues.

Good invoicing requires closer coordination between the employees involved. As stated previously, setting up a system or a workflow is crucial to make things work, either for sending payment applications or having everyone coordinate at once. Cloud-based software can be used as a central hub for your people, making collaboration much easier and seamless.

4. Process change orders as fast as possible

Get additional expenses and other change orders approved as quickly as you can. Doing so will help you bill on time and get paid as the costs come in. But if you wait until the end of the work to the bill, you will not have the cash to cover the additional costs while they’re being incurred.

5. Create accurate estimates

Using a job schedule and estimate, you can project cash flow needs for work ahead of time. The more precise your estimates are, the more accurate your cash flow projections will be. You also need to take note of the number of months you’re waiting on your final retainage payments. The months represent your overall profit on the job. And the longer you wait isn’t good for your cash flow.

6. Protect your company’s right to file a mechanics lien

Have you been worried about the risks of nonpayment? If so, a mechanics lien is one powerful tool that can help you to ensure you’ll get paid. Since each state has its mechanics lien and requirements, your company must track the different deadlines and rules. You have to make sure that your payments are being protected on each project. 

One of the huge parts of managing cash flow in construction is quickly collecting what you earn. So it shows how crucial it is to implement a strict policy for the mechanic’s lien. 

7. Project Future Cash Flow

It wasn’t easy to create projections when it comes to your cash flow. In fact, it’s a bit more complicated in construction compare to most industries because of the varying degree of change orders and jobs on current projects. By taking advantage of project scheduling tools, you can get a general idea about the expenses and finances you expect to see in the future.

Proper planning in anticipation of such events will help you prevent issues in the future.

8. Spread out costs

Never utilize the cash to purchase materials and supplies unless you are receiving a steep discount. Instead, ensure that you finance such purchases. Most suppliers often provide contractors with many options, like lines of credit, loans, and credit cards.

You should be accountable for interest charges and other financial matters. This will leave more cash on your hand for your construction business to continue operating. On top of that, you might be able to write off the interests and other fees as business expenses.

9. Train Your Project Manager Regarding Cash Flow Management

Almost 85% of cash in construction often comes from projects that are working in progress. This only means that cash flow performance depends on the project manager’s cash flow management. Make sure to train your project manager about the essential components of the construction cash flow. Widen their understanding and hone their project management skills. In return, you can offer your PMs an incentive package that is based upon the cash flow performance. 

This is most likely to be effective.

10. Financed your fixed assets

It’s crucial to keep cash on hand as much as possible, including as you buy fixed assets. So to save cash from being closely tied up while concurrently ensuring projects are equipped to go on as scheduled. It’s best practice to pay them off over time and finance the fixed assets simultaneously. This leaves you with sufficient financial resources to fully cover up your other obligations and establish your credit rating at the same time.

Managing Cash Flow with Project Management Software is the Key to Survival

 

Spreadsheets have been used over the years when tracking and inputting any financial related. However, it reached this point when it becomes outdated and less valuable. In many cases, you find yourself quite challenged when looking for specific details when using spreadsheets. This tool doesn’t provide the accuracy checks needed to diminish any arising issues. Moreover, spreadsheets cannot even provide real-time data to support much better decision-making, help you seize more opportunities, or even address possible cash flow shortages.

As cash flow becomes a top priority on your business, staying on top of your finances becomes increasingly essential. And to maintain stability, you have to invest in a cutting-edge software solution. Pro Crew Schedule is the leading software in the market that offers a range of features designed to track and monitor your cash flow. Every aspect of your business, including your cash flow, team, and inventory, can be managed seamlessly.

Pro Crew Schedule is also integrated on over 3000 software and applications through Zappier, another advantage! Start your FREE trial now!

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