Cash flow management ideas for the construction industry

Cash flows are a significant part of a construction business. A healthy cash flow allows for a more stable business and leads to steady growth. Maintaining a steady cash flow in the construction industry is critical for a project to be successful. This is easier said than done as construction projects are complex and risky. Expenses are guaranteed to be incurred, but income earned is often less predictable. Here are a few broadly applicable cashflow management ideas which can help construction companies.

Create a cash flow forecast and select profitable projects.

Analyse tenders and bid on projects that will be profitable for your business. Avoid taking up projects that have tight profit margins because managing cash flows is difficult enough on profitable projects. Take the time to determine if a project will yield a sufficient return based on the projected timeline and costs. It is impossible to accurately forecast the exact cash flow that you will have available during a project due to the unexpected change orders that will occur, but that doesn’t mean you should begin a project without foresight. Performing a cash flow forecast can give you an estimate of how much cash you will require to complete a project.

Project Tracking

Being able to capture, organise and track everything that is happening on your projects enables you to stay on top of labour, supplies, rental equipment and other project-related costs. Spreadsheets can be used to track these costs, but a dedicated accounting system is best suited for the long run. The right accounting reports and financial statements are crucial to determine whether the cash flow is healthy and where it needs support. You can’t manage what you don’t measure.

Negotiate better payment terms.

Be sure to negotiate a favourable billing structure with the customer that provides the best contract terms for your company. Negotiate the best prices with suppliers, vendors, and subcontractors, as this will also impact the cash flow of the project. Your terms with your suppliers should ideally be equal to or longer than the terms you give your customers. Remember, sacrificing a profit to take more work almost always means a negative cash flow, as the profit markup may also be used to cover any contingencies or unforeseen expenses.

Finance fixed asset purchases whenever possible

Spending cash to avoid interest payments doesn’t always make sense when it comes to maintaining a healthy cash flow. By making smaller payments over time, you will free up cash which can be used for other necessary project costs. Another benefit of financing purchases is that you are building a good credit rating. This rating comes in handy when you need to apply for a short-term loan or need other financing for your business.

Stay on top of Change Orders

Change Orders can delay the completion of a project and reduce your profit margins considerably. It is crucial that project managers resolve Change Order disputes swiftly to ensure that timely payments are received. A dispute resolution can take additional weeks or months to collect the cash already spent on the project.  Helping project teams manage and resolve Change Orders in a proactive and efficient manner, can help expedite the company’s change requests and its ability to bill and collect for those items.

Communicate effectively with customers.

Managing a successful cash flow requires construction managers to regularly and effectively communicate with customers to ensure that all stakeholders are on the same page. Communicating the customer’s responsibilities when it comes to payment schedules, amounts and deadlines, is crucial for the success of the project.

Send out invoices timeously.

Invoicing can be tedious for construction managers, but they are an important part of your cash flow. You can write up your invoices by hand, but it would be better to purchase software to make the task easier. Invoice generation can be automated and sent as soon as possible to maximize cash flow potential.

Take advantage of technology

As a business owner, you should take advantage of technological advances and artificial intelligence-enabled solutions. These can streamline your business processes and increase efficiency. The right technology and business strategies will allow you to spend less time worrying about cash flows and more time running your business.

Speed up your closeout process.

Closing out a project and collecting the final payment can be difficult. Effectively managing the final snag list and closeout documents, can improve the timeliness of the final payment and avoid decreases in retainage.

Conclusion

Effective cash flow management is a crucial aspect of construction finance management. Regulating a project’s finances and addressing the cash flow challenges in the construction industry will ensure that projects are completed on time and within budget, thus increasing the profitability of your business.

Reetesh Balgobind

Assistant Finance Manager

References

https://www.sage.com/en-gb/blog/construction-cash-flow-management-tips/

https://www.constructconnect.com/blog/7-tips-for-managing-cash-flows-on-construction-projects

https://www.levelset.com/blog/managing-cash-flow-construction/