4 Strategies to Improve Construction Cash Flow
Updated: Jun 28, 2022
One of the most common reasons contractors and subcontractors become insolvent is they run out of cash. In the construction industry, you usually have to pay upfront much of your projects’ costs before ever sending out the first invoice. That’s why managing cash flow is of the utmost importance in growing your construction company. Without effective construction cash flow management, you may fail to pay your project's expenses no matter how many new projects it has lined up.
What is cash flow?
Cash flow is the movement of income into and expenditure out of a business during a specific time period. Cash flow is the key measure of a company’s financial health, liquidity, and ability to cover its bills every month. Positive cash flow indicates that more money is coming into the business than is going out of it. Whereas more money is going out, cash flow is said to be negative.
A business’s cash flow is repressed in a cash flow statement.
Construction Cash flow
In construction, cash flow typically refers to an analysis of when costs will occur and how much they will amount to during the life of a project. They use data to determine income and outgoings margins, and profitability over a given period of time or to assess the financial health of their business.
Having a negative cash flow causes catastrophic consequences. If financial problems are not turned around, may lead to the ultimate downfall of the company.
Doing this may be uniquely challenging, but don’t worry. We’ve listed 10 strategies to improve construction cash flow you can employ to go from being red to getting back into the blank.
4 Strategies to Improve Construction Cash Flow
Positive cash flow enables a construction company to cover its expenses in the here and now.
Use cash flow forecasts
Cash flow forecasts involve estimating your future income and expenses.
It’s important to conduct a cash flow forecast to identify cash shortfalls and surpluses. It’ll tell you if you’ll have enough cash to work on your project or not. By looking ahead, you may be able to anticipate what your cash flow may look like at a specific time to create an accurate and realistic budget.
Additionally, a cash flow forecast also can help a company see the impact of a potential investment or how much additional cash needs to generate to make the payments.
Billing is the process of generating and issuing invoices. All invoices should be sent out as soon as possible and adhere to a schedule if you want to maximize cash flow potential.
An efficient billing process forms the foundation for a streamlined payment collection and is crucial to your accounting and bookkeeping. For a small business, billing often requires more investment (such as depending on billing or invoicing software). Construction Cost Accounting offers end-to-end bookkeeping and accounting services for contractors to help improve the efficiency of client payments and minimize losses. Get a Free Initial Consultation Here.
Obtain a credit line with the bank
Remember not to use all cash to buy your supplies and material unless you’re receiving a steep discount. You can negotiate with your suppliers about financing options - including lines of credit. Though you will be responsible for finance and interest charges, you won’t be out of pocket for the full amount as you’ll have to make regular payments.
To make sure you finance these purchases, obtaining a credit line with a bank can benefit your construction company. A line of credit can help alleviate negative cash flow, leaving more cash on hand for your business to continue operating.
Avoid over or underbilling
Overbilling occurs when a contractor invoices for more than the work is completed, putting more cash in a contractor’s pocket early on. This practice is very beneficial to dealing with lay-payment clients so you can stay ahead of the project cash flow and maintain the project’s timeline. Although overbilling is an acceptable practice, significant overbilling pushes you at the risk of cash shortfalls at the end of the project if the extra funds collected early aren’t managed properly.
Underbilling is the opposite of overbilling and occurs when a contractor invoices for less than what is owed. Underbillings can lead to negative cash flow, making it difficult to cover payroll and other expenses. Most importantly, negative cash flow is represented on a construction company’s financial statements, making it a less attractive candidate when it needs financial support to bid on larger projects.
Ideally, a business’s cash flow management is to bill in line according to how much of the project has been completed.
The bottom line
Construction companies operate differently from most other industries. Your construction company needs a steady, positive cash flow in order to finance projects, pay workers and materials and grow your business. These tips and strategies provide you with a guideline to better manage and improve your cash flow. However, at the end of the day, hiring a qualified project manager is one of the most important keys to helping you improve your cash flow performance.
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