5 strategies for better construction cash flow
Wednesday, April 03, 2019
"Revenue is vanity, profit is sanity, but cash is king."
This oft-repeated adage has stood the test of time for a good reason. It is the principle that guides business owners on the importance of cash flow. No matter how successful you are in promoting your business and closing sales, operating with a negative cash flow can severely impact your operations. At worst, your business could fail.
Maintaining a positive cash flow is a challenge for construction contractors. The industry is notorious for having long periods between billing clients and collecting payments, but that doesn’t mean you can’t employ strategies to improve your cash flow.
A positive cash flow ensures that your business operates without a hitch, even during slow turnover. It protects your ability to compensate your employees and pay your fixed expenses. Most importantly, it guarantees adequate financing for your future projects and growth opportunities.
Here are five strategies that you can use to manage your cash better and maintain a positive cash flow.
1. Employ a strategic approach to your suppliers
Construction is one of the industries affected by seasonality and price fluctuations. The availability of raw materials and increased competition affect the cost of a project. Since accurate estimation of project costs is important, you need to manage how you deal with vendors and suppliers.
Always shop around for vendors that supply the materials you need in both the short and long term. Competition drives prices down. At the start of the busy season and before taking on huge projects, shop around to look for suppliers with better pricing. You should also maintain a close relationship with suppliers who may give you lower prices compared to those available on the market. Your loyal suppliers may even offer price matching to keep your business.
Routine analysis of your material expenses and the way you source them will free up cash and lead to better cash flow.
2. Send accurate invoices regularly
The sooner you send your invoices, the faster you get your payments.
There are two factors that can affect your bill collection — the frequency of sending your invoice and the accuracy of the bill. First, maintain a regular schedule for sending bills to your clients. Talk to your clients beforehand and include this invoicing schedule in the contract. Specifying a schedule lets your clients know when to expect the bill to arrive, putting you at the top of their mind even before the due date comes.
In addition, make sure to put accurate information in the bill to prevent delays. If they require certain attachments and information, make sure those are included. For convenience and faster billing, accommodate your clients’ preferred method of payment.
3. Consider other forms of financing
When you are in a cash crunch, financing can help you manage short-term expenses as well as your long-term projects. Financing purchases will involve paying interest, but it will help you preserve working capital for your operations. Large equipment and inventory purchases which can deplete your reserves fast could be financed through long term loans to spread the cost.
You may also consider leasing equipment, especially specialized equipment that you rarely use for your projects. This has a softer impact on your cash flow compared to an outright purchase. Leasing also keeps you from having capital sleeping by way of unused equipment.
Another good option is negotiating a line of credit with a financial institution you have a relationship with. You can do this when starting multiple projects or dealing with emergency purchases. However, the best time to go to your financial institution is when you don’t need the line of credit yet so you’re in the position to negotiate for better rates.
As you should with all transactions, take note of the financing terms to check if it works with your business situation.
4. Be aggressive when collecting receivables
The nature of the construction industry makes payment delays, and even non-payment, a reality to contractors. It is quite common for construction businesses to experience extended intervals between billing and collection, but this only gives more reason for contractors to have a proactive approach when it comes to collecting receivables.
Being able to identify the signs of A/R issues coming translates to faster action and resolution. Assign a key, reliable person to monitor payment due dates, and act accordingly when accounts are past due. To save time, use construction software to track accounts receivable and analyze data over time. This allows you to get relevant reports such as the Accounts Receivable Aging Report which gives you an overview of outstanding and at-risk receivables.
Finally, be aggressive by sending preliminary notices on all your projects. Protect your rights as a contractor and have options in place in case a client doesn’t pay.
5. Employ competent project managers.
Project management is an art. Your project managers need to be creative in managing your schedules. You don’t want to find your company stretched too thin and unable to start future projects on time.
Competent project managers will be able to prepare for emergencies, read the situation properly, and adjust the timelines to fit the circumstances. Because change orders are common in the construction industry, your project managers should be able to process them quickly to avoid costly delays. The more efficient your projects are managed, the earlier you can bill and closeout projects. Overall, this results in better cash flow.
There are still other cash flow strategies that we haven’t covered here, but these strategies should help you get on the right cash flow management track. Remember, no two construction businesses are the same. Analyze your case and apply the cash flow strategies that fit your circumstances. And don’t forget: Cash is always king.
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