Maintaining a solid cash flow is essential to completing a construction project. Consistently available funds provide the means for covering project expenses 鈥� without money, a project is doomed. This is especially relevant in the construction industry. Because of the nature of construction work and the contracts that cover them, poor cash flow management is a consistent problem for many contractors and can lead to stalled projects and ruined business relationships.
Here we鈥檒l talk about how cash flow differs from profitability, and discuss some methods your construction company can use to maintain healthy cash flow.
The difference between profitability and cash flow
One of the common cash flow construction cash flow problems contractors face is that they confuse cash flow with profitability. Profitability is a measure of whether a project or a business is making money 鈥� if the client on a project by its completion. Project profitability is a good measure of whether your bids are high enough to net you a solid margin you can use to build your construction business.
However, profitability isn鈥檛 necessarily enough to keep your construction business viable. To keep the doors open and the lights on, your business also has to have a healthy cash flow.
In contrast to profitability, construction project cash flow measures the net amount of a business at any given time. Construction companies paying for supplies, labor, equipment rental fees, and permit costs need to have enough cash coming into the business to cover those costs. If they don鈥檛, they have a negative cash flow.
鈥�Construction cash flow analysis assesses expenses and income to ensure adequate availability of funds throughout the project life cycle and throughout each year. Cash flow management strategies are critical for any business. They can be especially important for construction firms, who must maintain ongoing business operations but only get paid at specific project milestones. Accurate cash flow projections over the project鈥檚 life ensure adequate funding is in place to complete the project with a positive cash flow.
What follows are some cash flow management practices contractors can use to predict, plan, carry out, and analyze cash flow throughout their construction projects.
How to manage your construction project cash flow
Cash flow management practices ensure funds are available to pay your expenses. There are plenty of methods of doing this. Some contractors attempt to spread out expenses to preserve bank account balances, while others focus on backup funding to bridge any emerging gaps and avoid negative cash flows. Here are some ways to avoid common cash flow problems and ensure your business has the cash flow it needs to maintain operations throughout a project life cycle.
Bid well
The first step in ensuring positive cash flow is to make sure you鈥檒l get paid enough to cover project costs with a profit margin big enough to support business growth 鈥� you鈥檒l have to make sure the project will be profitable, in other words.
Accurate bidding involves thorough knowledge of the project at hand, a cash flow forecast and a lot of data about previous performance on similar work. Create a system for cash flow forecasting and tracking project metrics that you can use to understand actual costs and timelines on future bids.
Create contracts that work for you
One of the factors that cause construction cash problems is that while there are near-consistent expenses, revenue comes in only at specific, contract-specified intervals depending on project timelines.
- Create contract terms with a payment schedule and payment terms that will help you maintain a healthy positive cash flow throughout the construction project
- Make sure you get an up-front deposit before work on new projects begins
- Write a pay-when-paid clause into the contract so that you鈥檙e not liable for payment to subcontractors until you receive a progress payment or final payment from an owner
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Create and maintain a cash flow document
A construction cash flow statement maps out the cash that will be available throughout a project. It tracks accounts payable and accounts receivables so you can get a clear picture of the flow of money into and out of the business.
The cash flow statement isn鈥檛 a static document. It should be monitored and changed as needed, including when change orders occur. A detailed record will predict when funds might be tight so you can be strategic with bill payments, materials procurement, or other more flexible expenses until the business receives compensation.
Develop a cash flow contingency plan
Despite the best planning and intentions, sometimes things don鈥檛 go to plan. Delays of any kind can cause serious cash flow challenges, and they frequently happen on construction projects. Have a plan B 鈥� a line of credit or an asset you can liquidate - to help you maintain business operations until you receive another payment.
Tighten your accounts receivable process
Finally, healthy cash flow necessitates regular influxes of revenue, which means you must invoice! Your customers aren鈥檛 likely to pay until you produce a bill with specific payment terms. Send accurate invoices as quickly as possible and remove as many barriers to payment as possible. With 吃瓜新闻, you can create invoices quickly and easily, track payments for more revenue predictability, and include a payment link directly on your electronic invoice.
吃瓜新闻 also tightens up the payment timeline. Once your client receives an invoice, 吃瓜新闻 can facilitate instant payment, unlike ACH payments which can take multiple days鈥� processing time. Checks can even take weeks by the time your clients鈥� AP team has them printed, signed, and sent via snail mail to your business, and even then they may be subject to holds by your financial institution.
All the time you鈥檙e waiting for payment to finalize is time you can鈥檛 use those funds to run your business. Do your part to shorten the timeline between the work you do and the cash in your wallet to improve the cash flow through your construction business.
Pinning down your construction cash flow management
Profit alone isn鈥檛 enough to keep your construction business running. You need cash flow to make sure you can pay consistently emerging costs. Managing your construction business鈥� cash flow requires consistent tracking and monitoring efforts, but it doesn鈥檛 have to be that difficult. Create a cash flow management plan, track money in and out, and make sure your receivables are on point to keep revenue coming in. Check out how 吃瓜新闻 can make it easier for your construction company to track cash flow and make it easier for clients to pay you 鈥� get started today!
