Where Is My Cash? Cash Flow Management Tips For Construction Industry
Updated: Jan 10
Where is my cash? You might have asked yourself that question a couple times.
When it comes to handling your business accounting, there are a few key financial statements you will need to generate on a regular basis. Statement of cash flows is one of the main ones!
Why, you would ask.
Not only do these reports share vital information about your business with interested parties (shareholders, potential lenders, and creditors), but you can also use them to get a good sense of how your business performs. It can help determine whether there’s enough cash flow to function and to cover upcoming expenses.
If the cash reported is consistently higher than net income, that’s a good sign! It means that the business is bringing in more cash than it’s using. Don’t you find such information useful?
There are some industry best practices you can implement into your construction business to ensure your cash flow doesn’t put you at risk of financial instability.
1. Don’t use your cash as a financing tool. Contractors commonly use their future cash flow from jobs, or money from personal savings as a way to finance current projects. Yes, it’s a low-cost form of financing, but it makes it hard to cope with downturns in the market or an unexpected drop in business. Instead consider financing options that give you affordable access to the amount of cash you need to do your work.
2. Consider leasing items instead of buying to conserve cash. Secure long-term financing for fixed asset purchases
3. Stay on top of change orders. Change orders can have a big impact on your cash flow so it’s important to document the extra work completed.
4. Expedite payment collection.Number one issue with cash flow arises from clients not paying on time or contractor not invoicing immediately after the work was completed. Nowadays you can issue invoices electronically, send reminders and receive a credit card payment all in one place. Easy and fast. Use that option! Yes, it will cost you a small fee, but it’s better them not getting your money on time. Include payment policies with invoices, like “net10”. Create an easy system so you don’t waste your time or the opportunities to bill your clients early. Studies show that if you wait longer than 48 hours to send an invoice, you have eliminated the “sense of urgency” that proves you’re serious about collecting what’s due.
5. Increase the profit margins, not volume.Resist the urge to lower prices in order to increase job bookings and consider raising your prices. Customers are value sensitive, many are willing to pay a good price for a great quality service. Offer add-ons. When you offer additional products or extra services ("add-ons") at the same time, your overhead usually remains constant while your profits increase.
6. Think twice about your client policies.Protect yourself from the situations when a customer cannot or doesn’t want the project to be completed. You don’t want to be loosing money on the materials, equipment and other supplies that you have purchased for the job. Require an upfront deposit or consider billing by the percentage completed.
7. Always be prepared. You should have 6 months of cash flow reserves (that’s good case scenario).
8. Watch your numbers closely.I know that as a construction professional you are wearing all these hats, trying to excel at everything, stressing out and trying to come up with extra time to complete all the business tasks. But you have to know your numbers! Hire professional help, or figure out the basic bookkeeping matters. Take the time to calculate the gross profit for every job. If a job doesn't meet your profit requirements, immediately determine why.Pull up the necessary reports, like:
- Job Cost Reports
- Work in Progress Schedule
- Job Profitability Report
- To be in control of your billing and collections you should look at the Accounts Receivable Aging Report.
- Make sure you don’t go over your estimates by comparing Estimates vs Actuals
Cash flow management may be a challenging aspect of owning a construction business, but you must implement the best practices to build a financially stable business.