Cash flow is the lifeline of any construction project, no matter how big or small. Being able to effectively manage cash flows throughout the lifespan of not only your projects, but also the entire company as a whole, can be the difference between a company that is profitable and one which is approaching bankruptcy.
As mentioned in our previous article regarding late payments and their impact on the industry, cash flow problems can be a big cause of not paying or getting paid on time. In this article, I will focus on providing you with some tips to effectively manage your own cash flow. These tips will equip you with the tools required to mitigate the impact of any external factors that might affect the success of your business.
What is Cash Flow Management?
Cash flow management is the process of organizing and analyzing your expenses and revenue in such a way that it is used to control the flow of money in and out of your business. If you’re using an accounting software solution (which is most of you out there), there should be a simple way to generate a report which highlights this information in an easy-to-read format. As a business owner or executive, it should be your primary goal to make sure that your company is generating enough cash and anything that might impact this negatively needs to be dealt with immediately.
If done correctly, cash flow management allows companies to predict periods of cash shortages and plan their operations accordingly. For example, if you know that you will be receiving a $50,000 payment two weeks from now, this will allow you to make better decisions on what bills you can pay and when, knowing that the $50,000 will be in the account in a couple of weeks. If you didn’t know this you might choose not to pay any bills, ultimately accruing late payment fees or missing out on early payment discounts.
As I mentioned earlier, cash flow is the lifeline of your company. When you assess your company's cash flow, you are essentially mapping when cash will enter and exit your business, and how much. This is critical because the timing of each of these transactions can drastically affect the financial standing of your organization, and even your ability to accept a project.
Cash Flow Management Tips
Below I’ve accumulated a list of tips you can apply in your business immediately to help better manage your cash flow. There is no need to change your customers' paying habits (although we all wish we could) but, instead, you can simply just focus on your internal workflows and systems.
1. Polish Up Your Accounting Procedures and Reporting
Without the correct financial reports to help identify whether your company’s cash flow is healthy or not, all efforts that follow are practically useless. This is number one on the list for good reason. Good accounting procedures are key in identifying strengths and weaknesses, as well as making informed decisions.
2. Stop Paying Bills Earlier Than Needed
Paying your bills as soon as they come in can leave you strapped for cash in the event of an emergency or unforeseen circumstance. This is why it is essential to wait until more cash is available or until the end of your payment terms before making such payments. It is definitely good to pay your bills early, but spending money that you don’t have yet can lead you to a negative cash flow scenario which is not where you want to be.
3. Budget for Holdback
Holdback, otherwise known as retainage, is usually around 10% of the contract value for contractors. Failing to budget for this throughout your project means that you’ll be short 10% of what you are invoicing every month. This may not seem like a lot but, oftentimes in construction, profit margins are well below 10%. This means that you’ll likely be cash flow negative at some point during the project and it won’t switch to positive until the very end when you receive the retainage back.
4. Finance Your Asset Purchases Whenever You Can
This one might seem a bit counter-intuitive to some, but giving away your cash to avoid interest payments doesn’t really make sense when it comes to cash flow management. Making smaller payments frees up cash for your company to use for necessary expenses such as payroll and vendor bills. Another pro of doing things this way is that you’ll be simultaneously building up a good credit score, ultimately allowing you to apply for loans and other means of financing to boost cash flow at better rates.
5. Start Negotiating Better Payment Terms Into Your Contracts
Well before starting a project, be extremely diligent in reviewing your contract documents and scope, and seek counsel from a lawyer if possible. Payment clauses, such as ‘paid when paid’, are often added to protect the GC or owner and not the subcontractors, so knowing which clauses to look out for is key in protecting yourself from not getting paid. Contracts can be changed, so make sure you take this time to ensure your company is not getting the short end of the stick.
6. Send Invoices Out Immediately & Accept Electronic Payments
Making it easier for your clients to pay you should be a no brainer for cash flow improvement. Studies show that electronic payments can speed up typical construction payments by as much as 2 weeks! Focus on invoicing for work as soon as it is complete, but also receiving payment as quickly as possible. One way to do this is by using construction workflow automation (CWA) software. OnTraccr's CWA platform can help you fully automate the entire invoicing workflow, allowing your team to quickly invoice clients the second your crew is finished with the work.
Cash is King
As the saying goes, “revenue is vanity, profit is sanity, but cash is king”. This means getting paid for the work you do should be a top priority when it comes to managing your business. This is why it is essential to utilize the tools that are out there to help automate your workflows, ultimately making it easier for your customers to pay you, and helping ensure that you are always invoicing your clients as soon as the job is done.
If you enjoyed this article, join our mailing list now to receive all the latest articles and stay up-to-date on what OnTraccr is developing to bring automation to the construction industry!