Construction Finance: Common Cash Flow Problems
Updated: Aug 25, 2020
This is part of the series Construction Finance on Construction Cost Accounting website.
Part 1: How to Manage Finance for Small Business Owners
Part 2: What is cash flow and why is cash flow management important?
We’ve come to an understanding of what cash flow is and why it’s important to small businesses. Here are some common cash flow problems that small business owners would want to resolve.
The financial stress of having to pay for your employees every week or two can make cash flow difficult.
The Construction Payment Report found that employee paychecks are the biggest casualty of poor cash flow caused by late payments. Employees won’t like it when you tell them their paychecks are delayed until your customers pay the bills.
Paying bills early
It sounds good when having your bills paid promptly, but you should refrain from doing just that. This can leave your cash strapped. If you continue to spend money you haven’t had yet, you could end up with negative cash flow (which isn’t good at all).
Waiting until more cash is available, or until the end of payment terms, gives you more money to work with during the days between.
Failing to budget retainage
Retainage – or retention – is the percentage of payment withheld from a contractor during a construction project. This is a very common practice in the construction industry, taking up about 5-10% of the total contract.
If you’re not used to having a portion of each payment progress held back until the end of the project, and you don’t plan your budget accordingly, it can lead to major cash flow problems for your construction business. You may not have enough room to pay overhead or other expenses once payments come in.
Late invoice for your customers and slow-paying customers
Many small business owners wait for invoices to pass the due date to start chasing it, mostly because they’re afraid sending out a reminder can break a business relationship.
The longer you wait for payments from your customers, the longer you run your business without any cash to run it. They don’t just impact your cash flow. Late or slow payments can cost you more, as late fees and finance charges add up quickly.
Put excess cash for investment
Investment using excess cash sounds like a great idea since you can gain more money through interest and investment gains. However, if a cash urgency ever comes up, you’re often left with no quick way to recoup that money.
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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