This is part of the series Construction Finance on Construction Cost Accounting website.
After identifying your business’s cash flow problems, let’s look at some ways that construction business owners, contractors, and credit managers can better manage cash flow.
The list consists of 10 ways that construction businesses can improve their cash flow status, and they don’t require changing your customers’ payment habits, which is a plus.
Establish good accounting and financial practices
As a business owner, what you need for your company to better manage finance is the right accounting reports and financial statements to identify where your cash flow is healthy, and where it needs support. After all, you can’t manage what you don’t measure.
Not only knowing just how much money business owners have in the bank, but they also have to understand how each project on your books affects your cash position overall.
For example, an accounts receivable report lets you know which customers are delaying payment so you can follow up. An accounts payable report will help you identify aging bills that are accruing interest penalties. A cash flow forecast predicts future cash issues, so you can take action before it affects your bottom line.
Good accounting and financial practices help business owners manage cash flow, identify strengths and weaknesses, and make more informed decisions that help the business grow.
Finance fixed asset purchases whenever possible
It doesn’t make sense to give away all your cash to avoid interest payments, especially when it comes to cash flow. By making small payments over time, you free up cash each month, which could be used for necessary business expenses, such as payroll.
Another benefit of financing purchases is that you can build a good credit rating, which comes in handy when you need to apply for a short-term loan or other financings to help your business.
Negotiate for better payment terms
Negotiate with your suppliers to get the best deals. Buying in larger quantities, or even threatening to change suppliers to get better pricing. Make sure you get the best prices and payment terms from all your vendors.
Invoice – promptly and regularly
Remember to invoice your customers regularly. Avoid delays in payment by following the billing schedule closely and ensuring that you include the required documents with each invoice. Get a confirmation that invoices have been received and follow up a week later for any issues.
Offer different payment options and/ or discounts for early payment
Offering your customers multiple ways of payment can help you get your cash faster. Many companies like the convenience of paying by credit card, even for large purchases. There is a transaction fee for each charge, but it can be worth it to get your cash faster.
You can also offer discounts to encourage your customers to pay quickly. However, don’t make it so steep. 2% to 5% is a standard for the construction industry.
Avoid over and under billing
Overbill a project can create an influx of cash upfront, but nothing to cover expenses at the end of the project. Underbilling is no help either. Try your best to keep your billing as close to your costs as possible, so you will always bring in enough cash to cover your expenses.
Process change orders as fast as possible
Get approval for your additional costs and other change orders as soon as possible so you can bill for them and get paid as the costs come in.
Create accurate estimates
You should be able to project cash flow needs for a job ahead of time using estimates and job schedules. Accurate estimates can lead to more accurate cash flow projections.
Speed up your closeout process
Waiting months for final retainage payments isn’t good for cash flow. This might represent your total profit on the job. You need those funds to pay business expenses and invest in your company. Do your best to turning in your closeout documents as promptly as possible.
Protect your company’s right to file a mechanics lien
Every construction business owner worries about the risk of non-payment. A mechanics lien is one of the most powerful tools that construction businesses have to ensure they get paid. Since every state has its own mechanic's lien laws and requirements, it’s important that someone in your company is tracking the different rules and deadlines.
A big part of managing cash flow in construction is about collecting what you earn as quickly as possible. A strict mechanic liens policy in place can help your construction business to collect payment faster with less effort.
Want to survive in construction businesses? Manage cash flow better
Cash is king, as they said, so getting paid for the job you do is extremely important. Above are just a few ways to better manage your construction business’s cash flow. And remember, your payment rights have to be protected.
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!
