Cash flow is a major concern for most construction firms. When cash is low, it could mean being unable to make payroll or purchase supplies for an upcoming project. If that happens, it’s more than the immediate profit at stake; you can damage your firm’s reputation and success. These tips can help you understand how to manage cash flow throughout the year to protect your construction firm.
Be aware of challenges to cash flow management.
As a construction firm, there are additional complexities to managing cash flow that other industries may not have. Firm owners juggle multiple projects simultaneously, including schedules, budgets, contract requirements, and payments. Late payments are also something to be aware of. In 2021, 71% of construction businesses reported taking out a lien to get paid for work completed.
Be selective in your bidding process.
Bidding on all projects available can be tempting to bring in more business. Not all jobs are created equal. While some will make your firm more than others, you should avoid projects that are not estimated to be profitable altogether. When bidding, ensure you’re creating accurate estimates for the cost of the work rather than using a rough estimate. These two items will help ensure the firm’s projects are making money.
Protect your firm from profit fade.
When you earn less on a project than you initially expected, it’s called profit fade. While not all is avoidable, you can limit this phenomenon by doing accurate job costing and efficient change order management. Accurate job costing is simply understanding the exact costs of doing the work for each job. Change order management involves tracking changes made to the scope of work throughout the job process. Change orders should be created and signed by the customer before any changes to the job occur. Doing so will put the client and firm on the same page about how much time will be needed and how much it will cost to complete the change.
Manage outstanding invoices.
Invoicing is a key part of the construction firm’s job, as it tells the client when and how to pay your firm. Start by negotiating beneficial terms during the contract process and consider offering discounts for early payments or payments in cash. Invoice promptly and according to the contract terms and speed up the close-out process so the final invoice can go out faster. Lastly, pay attention to invoices to avoid over- and under-billing. If payments aren’t made on time, follow up with the client to collect the funds.
Considering financing to free up cash.
Large purchases can drain cash flow quickly. Financing materials for jobs or fixed assets can spread out the deductions from your account and potentially balance them with invoice payments.
Construction firms can face cashflow challenges for many reasons: the nature of the industry, inaccurate bidding, profit fade, or not understanding cash flow management principles. If you’d like an outside perspective on your cash flow system and tips for improving cash flow, call our knowledgeable professionals today!
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Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.