Eight Different Ways To Keep Contractors’ Cash Flow In Good Shape

To maintain a healthy cash flow, consider the following best practices:

1. Establish a reserve fund

As several contractors discovered during the 2020 project shutdowns, having a financial reserve large enough to withstand prolonged storms — both literal and metaphorical — is critical. Calculate the company's estimated monthly expenditures and set a target to save enough money to cover them as long as you need. Aim for three to six months for most construction companies. Contributions to the cash fund should be budgeted as a fixed cost, and you should pay it back if you need to use it.

2. Finance assets

Financing is a good way to free up working capital. Rather than purchasing construction equipment and vehicles outright, you can save cash on hand for business by financing or leasing them at a low cost.


3. Get a line of credit

Revolving credit and business lines of credit give you immediate access to a set sum of capital. Generally, you can use credit to pay for things like payroll, materials, and monthly bills. You request only what you need at the time and pay interest for what you use, similar to how you would for a credit card.

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4. Shop around for materials

Talk to suppliers to get the best offer on materials, inform them that you're "shopping around" for a decent price. Using financing or inquire about flexible payment plans until you get a discount for paying in full upfront. Remember that paying suppliers and other vendors before you get paid could put you at risk of running out of cash.

5. Be assertive when issuing invoices and collecting payments.

You'll get paid faster if you bill early. In an industry known for long lead times between billing and payment as construction, timely invoicing is important. Accept the invoice schedule specified in your contracts, and call and follow up on invoices that aren't paid on time on a regular basis. Set up your company to accept electronic payments if you haven't already.

6. Usage clauses that require payment when or where it is received.

Have a provision in your subcontractor contract that binds payment to when you collect payment from the project owner. This keeps you from blowing your budget.

7. Manage cash on a project-by-project basis.

This entails creating a cash flow forecast and making the required changes along the way. Monitor work-in-progress and cash flow reports to detect possible financial challenges when they're still manageable. Keep an eye on your overbilling and underbilling to make sure you're billing as close to your costs as possible.

8. Quickly process change orders

Process change orders right away rather than waiting for the project to finish. You'll be able to get approval easily and charge for the extra costs when they come in. Also, send project closeout documentation as soon as possible to collect final payments.

Are you ready to get help, or are you still not sure if you need help to run your construction business? Contact Construction Cost Accounting to have a free 15-minute consultation!

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