Managing cash flow is one of the toughest things to keep under your control as a construction business owner, and the problems when managing your cash flow are also some of the worst. So, your company must address the poor practices that drain the cash and build better cash flow management practices to prevent future issues.
In this blog, let’s take a closer look at what cash flow is, its importance, the problems you will face, and the best possible solutions for such issues. Let’s dive in!
What is Cash Flow in Construction?
Cash flow is the net total of cash and cash counterparts flowing in and out of your construction business at any period. If your company has more income expenditure, it has a positive cash flow. The capacity of your business to generate positive cash flow often determines how much value it can create for the shareholders, thus, the necessity to manage your cash flow properly.
A construction company like yours needs to analyze when your projects incur costs and determine how much these projects will cost. The cash flow analysis you are about to perform helps your company have proper funding for all things needed – materials, manpower, equipment, and many more.
Construction Mistakes that are Draining Cash Flow
1. High payroll burden
If your construction company does a super labor-intensive job, the financial stress of getting your employees paid every week will make cash flow easier. Paychecks are one of the biggest casualties of poor cash flow, often caused by late payments. This is different when you have a lot of subs because payments for them are not a hustle, only occurring once per month.
2. Paying bills early
Paying your bills as soon as they pop in may leave your cash flow strapped. Waiting until additional cash is available, or perhaps until the end of the payment terms, may give you more cash to work with in the days between. While it is better to pay your bills on time, especially if you continue to spend money you still need to, you may end up in negative cash flow. This could be better.
3. Failing to budget when it comes to retainage
Retainage, also known as retention, is the money withheld until your project’s end to ensure it is completed in terms of specifications. In the commercial construction industry, retainage earns 5-10% of the overall contract.
If you are not used to obtaining a greater portion of every payment, do not budget accordingly. Your company may run into many cash flow issues.
4. Paying cash for assets
Creating a positive cash flow for your construction business is also about managing your working capital. Working capital is the liquid cash you currently have in your bank account to pay wages, bills, and other expenses. If you purchase new equipment or tools using your cash, you indirectly steal money from your company.
Financing equipment or any other big purchases frees up your cash flow to cover necessary costs like supplies and payroll.
5. Slow-paying customers
The longer you wait for payment from your client, the longer you need the necessary cash to run up your business and pay your people. This affects your present and future cash flow. Be aware of the slow and late payments since the charges add up much faster.
Ways To Manage Your Cash Flow Better
Now, let’s take a look at some of the best solutions to avoid the cash flow problems we cited above and manage your cash flow even better:
1. Establish good financial practices
Every construction business needs the right financial statements and accounting reports to determine what areas their cash flow is positive and healthy, as well as the poor areas. As a business owner, you cannot manage what you do not measure well. Hence, you have to prepare accounts payable reports, accounts receivable reports, and a cash flow forecast.
Start building better financial and accounting practices that help you manage cash flow, prepare financial reports, determine strengths and weaknesses, and create more informed decisions that help your construction business grow.
Today, most accounting and construction management software can quickly produce reports automatically. As a matter of fact, construction solutions like Pro Crew Schedule are great construction project management software add-ons that you can integrate with your existing accounting software, making it easier to track reports and payments.
2. Financed fixed assets purchases as much as possible
Giving away all your cash to avoid interest payments does not apply to cash flow. Take note that if you make smaller payments over time, you can free up cash every month for important expenses like payroll. Another great benefit of financing your purchases is establishing a good credit rating. This particular rating comes in handy when you have to apply for shorter-term loans in the future.
3. Negotiate better payment terms
Even before joining a project, you are obligated to arrange the best contract terms for your business. This often includes striking out and adding terms that allow you to collect your retainage much faster.
Take your materials as an example. Make sure to talk to your suppliers about how to get the best offers on the construction materials you need. This might include purchasing larger quantities and changing suppliers to get better pricing. Ensure you get the right prices and the best payment terms possible from all the vendors you partner with. Remember, your terms with your suppliers must preferably be equal to or extended than the terms you give to your clients.
To gain more visibility in all your transactions, top-notch inventory management software will help you in the overall inventory tracking and process, including and not limited to the following:
- Construction assets
- Tools and other Resources
- Payment details
- Inventory levels and stockout
- Inventory data
- Inventory and equipment usage
- Reports
- And more
4. Invoice on time and consistently
Make sure you have a working system for sending out invoices and payment applications on a regular basis. With construction scheduling software, you can easily notify your clients of the invoice they need to fill. With this software, payment delays can be avoided because the billing schedule is trackable. You can ensure that the documents needed for every invoice are intact and saved via cloud storage.
While using this construction solution, you and your clients can easily share invoice details and track updates anytime and anywhere.
5. Invest in construction management software extensions
Construction technologies are becoming the best asset of any business today. And whether you are managing your construction crew, assets, inventory, and in this case, your cash flow – you can take advantage of this sophisticated built-in software.
Using this software, you can track approved invoices, expenses, and other expenditures, making it easier to spot any increasing issues in your cash flow and resolve them easily. This platform is easily accessible anytime and anywhere. So, for any changes and updates being made, you and your client can easily connect with one another.
6. Process change orders as fast as possible
Make sure to get approval for additional costs and change orders as quickly as possible. This is for faster billing and collecting as the extra costs come in. Because if ever you wait until the end of your job to pay the bill, you cannot have the money to cover the extra costs as they arise.
Make sure also to create accurate estimates. Using estimates and job schedules, you can predict cash flow needs for the job ahead of time. The more accurate your estimates are, the more precise your cash flow predictions will be.
Pro Crew Schedule is the All-in-One Construction Management Software
As they say, cash is king, and that means getting paid for all the work you finish. So, make the payment process easier between you and your clients since it is one of the best ways you can do to improve the cash flow of your construction company.
On top of that, ensure to deploy the best construction time tracking software – Pro Crew Schedule. As a company owner, you have tons of moving parts to monitor and update, and it can be hard sometimes to put things together in one place. Only with this software tool can you integrate multiple workflows and streamline all processes, including your accounting area.
Thanks to Pro Crew Schedule and its top-tier features that offer a one-stop solution for bookkeeping, project management, asset management, crew management, and other areas of your business. With over 3000 integrations possible, you can seamlessly incorporate Pro Crew Schedule into your existing construction software – Gmail, QuickBooks, Google Sheets, and more.
