Cash flow is one of the biggest challenges facing small construction businesses. Between underbillings, tax surprises, payroll and supplier payments, it can be difficult to keep cash flow positive.
Without satisfactory cash flow, however, your construction company will ultimately fail - construction companies need cash to pay employees and keep projects flowing. In this post, we’ve put together seven strategies to help you stabilise and improve your cash flow.
Many construction companies find that their cash flow is frequently sabotaged by underbillings. This happens when you’re not paid as much as you should have been paid for a contract. Usually, this occurs because of poor billing procedures. If documentation isn’t received from the field in a timely manner and if requisitions don’t get approved quickly, your billing will be deficient.
You can often solve these problems by using financial tools like working lines of credit in order to get the cash you need until your billing improves. Track your billing carefully so you can catch problems early.
Tax surprises can really throw off your cash flow, and that’s why it’s so important to plan your taxes carefully. Build a strong accounting department or outsource your accounting to a firm that has plenty of construction experience. You may be able to defer tax payments in order to finish projects or grow your company.
When you know what to look for, financial statements do more than just lay out your numbers on one page. Key ratios can help you to track patterns and identify patterns early, allowing you to fix potential problems before they do significant damage.
Pay close attention to the following ratios: Days Sales Outstanding (the average number of days it takes to collect receivables), Accounts Receivable Turnover, Retainage Balances, Working Capital (current assets minus liabilities), Debt-to-Equity (total liabilities divided by owners’ equity) and Project Gain.
Do you currently have adequate internal infrastructure for keeping your cash flow under control? For example, is your accounting department running smoothly enough to give you up-to-date data as often as you need it? How is your project management flowing? Proper communication between accounting and project management is essential for streamlining billing and keeping your cash flow healthy.
Unless you receive a steep discount for paying with cash, it’s wise for construction companies to consider using financing for the purchase of materials and supplies. Even though you’ll have to make some interest payments with this strategy, you’ll be able to spread out your payments and leave yourself more cash for day-to-day operations.
Since change orders are so common in the construction industry, it’s important to make a point of processing them quickly. Schedules can change due to extreme weather and all kinds of delays.
Project managers should process change orders immediately rather than waiting for the project to be completed. The quicker you receive payments, the better off your cash flow will be.
Accurate estimates will make it easier to forecast your cash flow and stay on track. One of the best ways to improve the accuracy of your estimates is to use estimating software. It can be used by many different construction professionals, including estimators, surveyors, builders and contractors.
With all of your pricing information collected in one place and saved as template price lists, you’ll have greater accuracy and all the information you need at your fingertips.
Managing your cash flow is one of the most important things you can do to position your construction company for growth. To learn more about our estimating software, get in touch with us at Buildsoft, or try out Cubit free for 14 days with a free demo below.