5 Tips For Managing Cash Flow In Construction Businesses

Did you know the construction industry is notorious for the late payment of invoices? If you’re used to getting paid within 30 days of sending your invoice, you’ll find it difficult to accept 50 -75 days before you can turn the payment into cash flow.

Small businesses and subcontractors rely on cash flow to survive, so in this article, we look at some industry-specific strategies you can use to help your construction business cope with the late payment of invoices.

Clear Communication and Quoting

Disputes in the construction industry are common, so you want to find someone with a good reputation that is easy to deal with. Do your research by talking to past suppliers, consider the last project they were involved in and how they did.

The other side to this story is to make sure you accurately research your own costs. Accurate quoting helps prevent nasty surprises down the track as well as helping ensure maximum profitability.

Underquoting hoping to get a certain job is a surefire way to create serious cash flow issues for your business. Cheap jobs can signal low quality and so does not guarantee you will get the bid. Accurate estimations of your costs and markup should be your main benchmarks for pricing to ensure positive cash flow.

Use Credit

Cash on hand is a valuable asset and should not be used as a default source of funds for general payments. One strategy to help improve cash flow is to keep cash for emergencies and use credit to purchase materials needed for construction. It is worth taking the hit via interest payments for the flexibility and ability to have emergency funds via cash reserves.

Get the Best Prices, Use Control Costs

Securing long term supplies of essential materials at low cost is a great way to help your cash flow. If you have carefully considered the project and accurately predicted how much material you need, this can be purchased in bulk for significant savings ahead of time.

Careful monitoring of the current market prices for materials starts with having solid relationships with your suppliers. Taking the time to shop around and using the natural competition amongst suppliers is key to saving on costs.

Review your fixed costs constantly and look for ways to remove or reduce them. Always negotiate with your suppliers for better terms.

Timing and Forecasting

Timing is crucial when trying to improve your cash flow. Careful planning at the data-driven estimations stage enables you to quote properly and structure payment timings at crucial junctions.

Barriers

Remove as many barriers or obstacles to turning payments into cash flow. Have all relevant evidence and invoices ready so that when payment is due, it is processed promptly. If you’ve done the work and the delay is on the other side, assert your rights and receive payment for services rendered.

The reality of construction work is that it is in stages. So too, the progress payments may not match up to what is due to your subcontractors and suppliers.  Its inevitable negative cash flow will impact the business for weeks on end.

Streamlining your forecasting process should start with a basic outline of the costs of the job. At a minimum, you need to consider a basic project management estimate or a cash flow spreadsheet. There are also professional solutions to these, but that is not necessary. As long as you have a system that considers materials, costs, and labour for each job to start from, you will have much more accurate quotes.

Be Aware of Cash Flow Drains

Payroll is going to be the major drain for most companies. There is generally not much leeway in delaying payments to your employees, although certain payment terms offered to subcontractors like paid-when-paid clauses can help delay these payments.

It would help if you also took into account timing when paying your suppliers. Paying bills too early is just going to tighten up your options. Consider the payment terms you have and pay nearer to the due date as much as possible.

Planning to Succeed

Cash flow management in construction is all about proper planning.

Accurate quoting based on cost calculations, a realistic understanding of how the construction industry operates, a focus on looking for the best prices and negotiation with suppliers constantly, and considering project-specific timings and avoiding cash flow drains is the key to keeping your construction business’ cash flow healthy.

Are you interested in using software to power your construction business? Check out this next article.