Tips for Managing Cash Flow in Construction Projects
Of the financial challenges frequently faced by construction companies, cash flow issues are perhaps the most common. It might be a surprise to learn that more than 80 percent of construction companies that fail are actually profitable. It is important, therefore, for construction companies to understand how they can effectively manage cash flows during projects and in general throughout the fiscal year.
Here are some tips to help your construction company manage its cash flow during a project to ensure it achieves profitability:
Provide realistic and profitable estimates: If a project doesn’t look like it’s going to be profitable for your business, it’s not worth doing. Cash flow is difficult enough to manage on profitable projects—it’s simply not good business to attempt to make an unprofitable project work.
Work in progress (WIP) management: Keeping a close eye on your projects in progress is absolutely necessary if you’re going to manage your cash flow well. Those projects should move along according to schedule so you can deliver on time and get paid on time.
Get in the habit of performing cash flow projections: Create forecasts for your cash flow, planning out how much work you’ll complete in a given week or month (depending on the length of the project) and how much you’ll be able to bill for at certain intervals. You’ll also need to factor in how much you’ll be paying to suppliers and subcontractors at different stages of the project. Once the project is over, compare this forecast to the actual receipts and disbursements so your projections can be even more accurate in the future.
Don’t be shy about collecting payments: You can assert yourself when it comes to getting paid for your work. After all, the client has signed a contract indicating they will pay by a certain time. Ideally, your accounts receivable should be settled in 40 days or less. Never start a job without a deposit, either—this will help with cash flow tremendously. Finally, know the length of time that net terms are best suited for when it comes to cash flow.
Be proactive about change orders: Change orders can have a significant impact on your cash flow. You should be clear in the contract for the job about what you can and cannot charge for. Any time you have to submit change orders, make sure you document those changes immediately and track all the additional expenses.
Negotiate terms that work for your company: The schedule and terms of payment should always be in the best interest of your company. You’ll need some upfront payments that allow you to pay for materials and get the project started, and depending on the length of the project you may need to engage in process billing during the course of the project to make sure you’re able to meet labor costs and pay your vendors and subcontractors. While it’s important and admirable to want to work out terms that also work for your client, remember that you’re running a business here as well, and you need to do what’s best for the financial health of your company.
Negotiate terms with your vendors: Developing good relationships with your vendors will also help you a great deal when it comes to cash flow. Try to get on the same page as your vendors and negotiate terms that work for them as well as you—this will make them much more likely to pay on time.
You should not compromise on cash flow management when running a construction company. Doing so could hamper your ability to complete projects and earn profits. Contact us to learn more about how you can better manage your cash flow during your next job.