Every construction company—large or small—faces cash flow difficulties at some point. Some struggle more than others. Many confuse cash flow with profit, yet even highly profitable businesses collapse when cash flow runs dry.
Construction contractors juggle the stress of completing projects while keeping operations running smoothly, and cash flow management often proves challenging.
Contractors battle issues like covering payroll, paying suppliers upfront, failing to budget for retainage, making early supplier payments, waiting on slow or late client payments, handling unpredictable change orders, and managing delayed closeouts. These pressures make maintaining positive cash flow difficult.
To stay profitable, construction companies must adopt management practices that prevent these problems. The following five tips show contractors how to strengthen cash flow and keep every project on track.
Five Ways Construction Companies Can Better Manage their Cash Flow.
1. Always have Project Estimates and Cash Flow Forecasts
The truth is that you can’t manage what you do not know or what you cannot measure. A cash flow forecast tells you if you will have cash issues in the future to ensure you act on them before it impacts your business. Likewise, it helps you identify your business’s strengths and weaknesses to take knowledgeable actions that help the business grow.
Consider the time it would take for project completion, the amount of work to be done every week, and how much money each day will take up paying workers, then plan a working estimate or cashflow projection for your business.
Cash flow management would require detailed financial statements to provide insights into the company’s financial status. Hence, contractors need to do monthly bookkeeping at the very least.
2. Monitor your Change Orders
An amendment to a construction project can have a massive impact on your cash flow. So, you must limit the change orders. Before altering the original project agreement, consider the cost and project schedule to avoid making losses. Also, make sure to establish the change orders billing terms in the contract, and document the changes to the project to prevent losses.
3. Avoid Over and Under Billing
Ending a construction project can be tricky as you end up with hidden costs. If you charge exorbitantly or overbill for a project before its start-up phase, you’ll have more considerable upfront cash but nothing to cover expenses when closing out the project. Underbilling can also be a problem. When working on a project, ending it might be tricky. Hence, it’s always best to keep your billing as close to your cost as possible, so you always have the means to gather enough cash for added expenses.
4. Have Clear Contract Payment Terms
Before carrying out a project, make sure to negotiate payment terms and conditions that favor your company’s best interest. The question now is; what should your contract terms include? These contracts terms could be:
- the staging of payments for proper payment plans and times
- the need for deposits in long term or large projects (you should take deposits for each step of the way in the project, i.e., set milestones)
- clear cut policies or agreements concerning change orders and closeouts
- adequate protection of your business and its cash flow
As a construction contractor, you want a payment schedule that ensures you get upfront cash for commenced projects like collecting payment for materials when dispatched to the Jobsite versus when the installation process is done.
5. Cut or Spread-Out Costs
Cash flow in construction is the analysis of when and how much cost will be incurred throughout the lifespan of a project. This can be significantly improved by cutting or spreading out costs where necessary. You can cut costs by discontinuing obsolete subscriptions or utilities, selling off old or useless inventory, and negotiating prices with suppliers.
You can spread out costs by using financing to acquire supplies and resources for construction rather than using cash. This will leave you with more money for daily operations unless paying with cash attracts discounted offers.
At the end of the day, what you desire is to grow your company and make money. Some of these tips seem cost-or time-intensive, but they eventually pay for themselves. Incorporating these tips will go a long way in improving day-to-day operations and, ultimately, improve your cash flow. Take gradual steps to improve cash flow management in your construction company.