For most construction companies, cash flow is a major concern. From purchasing supplies for upcoming projects to making payroll, maintaining a steady flow of funds can be challenging. If you’re looking for ways to improve cashflow for your construction company, these practical tips can be helpful.
Improving Cashflow for Your Construction Company
At The Ray Group, our construction niche team has years of experience assisting construction businesses in managing cash flow. As such, the following tips can help you understand how to manage cash flow for profitability and stability.
1. Managing Outstanding Invoices
One of the easiest ways to improve cashflow for a construction company is by tightening up invoicing. A good process for handling invoicing is to promptly send them after work is completed or milestones are met. Doing so not only speeds up the close-out process, but it ensures the final invoice can go out faster. However, make sure you pay attention to invoices to avoid under- and over-billing. But if payments are not received on time, follow up with the client to collect the funds.
2. Control Costs and Overheads
Efficient change order management and accurate job costing can limit “profit fade”. This occurrence happens when what you earn is less than what you originally expected.
Change order management simply means correctly tracking changes made to the scope of work throughout the job process. On the other hand, job costing involves clearly understanding the costs of doing the work for each job. In each case, proficiency can help improve cashflow for your construction company over time.
Also, using cloud-based accounting you can easily track your cash outflows and inflows in real time. By having real-time data, you can accurately schedule jobs strategically, plan for upcoming expenses, and prevent liquidity crunches.
3. Be Mindful of Cash Flow Vulnerabilities
Managing cash flow for construction companies can be more involved that in other industries. In fact, company owners coordinate multiple projects at the same time, including payments, contract requirements, budgets, and scheduling.
4. Focus Your Bidding Efforts
To bring in more business, it can be tempting to bid on all available projects. But keep in mind that not all jobs are created equal. With this in mind, you should steer clear of projects that are not estimated to be profitable. And when bidding, rather than using a rough estimate, make sure to create accurate estimates for the cost of the work. These two items help ensure that your company’s projects are profitable.
5. Considering Financing to Optimize Working Capital
Cash flow can be quickly drained by large purchases. So, a well-managed line of credit can help finance fixed assets or materials. Then the deductions can be spread out from your accounts, potentially balancing them with invoice payments. Although financing should never replace healthy cash management, it can serve as a safety net you need quick access to funds.
Final Thoughts
There are many reasons why a construction company may face cash flow challenges. For example, lack of understanding cash flow management principles, profit fade, inaccurate bidding, or the nature of the industry. If you would like an outside perspective on how to improve cashflow for your construction company, contact us for a consultation.
