How To effectively manage cash flow In construction

Managing a construction company requires paying attention to a bunch of different factors that affect growth, the livelihood of the company, and its success. One of the most important factors is cash flow. According to the Royal Institution of Chartered Surveyors (RICS), cash flow is the incoming or outgoing of money from a company over a given period (which is usually monthly). This way, the company is able to purchase material, pay salaries, fund projects and even cover any unexpected costs.

Construction companies work with long-term or short-term contracts and can create a forecast to stay informed about monetary commitments, claims, an extension of deadlines, payments, and other costs. That being said, managing cash flow is a very important task and should be completed with a high level of attention. The livelihood of the company is at stake, after all. 

If cash flow isn’t managed properly, then a few problems are likely to arise, such as limiting cash capacity because of too many current projects, 

Even before a construction project begins, owners and managers look for key metrics and information on what should be considered to complete it successfully. To make sure that projects are managed profitably, it’s crucial to maintain a constant cash flow before, during, and even after a project.

According to RICS, whoever is responsible for managing cashflow within a construction company has to take into account a few things:

• The initial brief from the employer to fully grasp the requirements for a cash flow forecast.

• The first draft of a cash flow forecast during a feasibility stage so that the employer understands their possible obligations.

• Updating the cash flow forecast throughout the contract period.

• Keep an eye on payments against the cash flow forecast to identify any discrepancies.

If there isn’t a good cash flow management system already part of the day-to-day of a construction company, then there is the risk of a few problems arising. Some of the most common problems with a lack of cash flow are too many projects but not enough cash capacity, no payment schedule or initial payment before a job begins, not being able to fund an entire project because of late or non-payments, and more.

To steer clear of these potential mishaps that can disrupt cash flow to a construction company, in this article we’re going to show you a few ways on how to effectively manage cash flow.

Managing Cash Flow in The Construction Industry

For a construction business to be successful and manage its projects effectively and profitably, the first step would be to look at all of the data that is available. This way, businesses can stay ahead of all the phases that a project goes through until it’s completed. 

If you want to manage your company’s cash flow accurately and seamlessly, then we’ve identified the first steps that you need to take. They are tracking your numbers closely, managing fixed assets, deciding on the best payment methods, and quickly-issued invoices.

Track your numbers

Numbers can be a tedious task, but they are your best friend in a positive cash flow scenario. So you need to follow your numbers as closely as possible. 

Being able to make out how every project you take on affects your budget as quickly as possible is a skill that can be made much easier with a little help. While spreadsheets can be useful, they won’t be as detailed as you would hope. And if you don’t have enough details, you can’t make well-informed decisions. 

Tracking your numbers doesn’t mean that you have to do everything yourself. In today’s world, all you have to do is install accounting software that can help you manage cash flow. Some software is even developed specifically for the construction industry. With most of these types of accounting software, creating dashboards that are easily customizable and prebuilt reports makes managing cash flow a breeze. You can track every cent that comes in and out of your company, organize your data with just a few clicks, and even stay up-to-date on how well your projects are doing. 

Don’t get too tied up with fixed assets

A fixed asset is an asset that is purchased for long-term use and won’t be converted into cash in the near future. These could include land, buildings, and equipment. Knowing how to invest in fixed assets is also part of a good cash flow management system.

Fixed assets are great investments and can yield a large profit in the long run, but it’s important to not tie up large amounts (or all) cash in these assets. As a construction business, it’s crucial to keep cash on hand whenever you can. Ensuring that all of your ongoing projects can continue as planned is the best way to keep the money rolling in. 

Look at better payment options

Ultimately, everyone who runs a business aims at making a profit. Even if you do something you love and it isn’t always about the money, your business needs a continuous flow of cash to sustain it. In order to better manage your cash flow, think about ways that you can ensure the best prices and negotiate better payment deals. 

This goes for your suppliers as much as it does for your customers. Talk to your suppliers and see what are some of the best offers that they can give for the projects that you are (or will be) working on. Some offers can even include buying in bulk or buying a different type of supply. And if they won’t budge, suggest that you might be interested in switching to a new supplier. If it is better for your business, then you have to consider it.

Issue invoices as quickly as possible

Invoices need to be somewhat in sync with cash flow. A good invoicing practice will ensure that both you and your customer know when payment will be made. The project manager and office manager are usually the ones who need to be in contact regularly for this process to go smoothly. 

If you want to avoid any payment delays, you can create a billing schedule and monitor it regularly. Make sure that all parties involved are aware o this schedule and that they are notified in time when payments are (or are to be) made. Accounting software can help with this issue as well, as they automate the process and notify you with confirmations on payments, invoices issued and invoices received. 

And in case you want to double-check and make sure everything is going according to plan, you can schedule a follow-up the next week after you send them the invoice to verify that there are no problems.

Final thoughts

In short, effective cash flow management requires a detailed plan and a determination to stick to it. Making sure that everyone involved in or with your business is aware of this management system somehow will also make things go a lot smoother. If customers know that there is a strict payment plan set up, then there will be a less likely scenario of mishaps, late or non-payments. Even your vendors will know how you do business. 

You can achieve a seamless and easy cash flow management system with the help of good accounting software. This can take off a lot of hours from your work schedule so you can work on larger issues at hand. So when you are aware of your numbers, know how to identify risks and opportunities, are transparent with the supply chain, and invoice regularly and quickly, you will have a steady cash flow to your construction company in no time.