5 Tips for A Better Cashflow for Your Construction Firm
Cash flow is a major concern for most construction firms. When cash is low, it could mean being unable to make payroll or purchase supplies for an upcoming project. If that happens, it’s more than the immediate profit at stake; you can damage your firm’s reputation and success.
The Grimbleby Coleman Construction Niche team has decades of experience assisting business owners in the construction industry in managing cash flow. The following tips can help you understand how to manage cash flow throughout the year to protect your construction firm.
Be aware of challenges to cash flow management.
As a construction firm, managing cash flow can be more complex than in other industries. Firm owners juggle multiple projects simultaneously, including schedules, budgets, contract requirements, and payments. Late payments are also something to be aware of. In 2021, 71% of construction businesses reported taking out a lien to get paid for work completed.
Be selective in your bidding process.
Bidding on all projects available can be tempting to bring in more business. Not all jobs are created equal. While some jobs will make your firm more money than others, you should avoid projects that are not estimated to be profitable altogether. When bidding, ensure you’re creating accurate estimates for the cost of the work rather than using a rough estimate. These two items will help ensure that the firm’s projects are making money.
Protect your firm from profit fade.
When you earn less on a project than you initially expected, it’s called profit fade. While not all are avoidable, you can limit this phenomenon by doing accurate job costing and efficient change order management. Accurate job costing is simply understanding the exact costs of doing the work for each job. Change order management involves tracking changes made to the scope of work throughout the job process. Change orders should be created and signed by the customer before any changes to the job occur. Doing so will put the client and firm on the same page about how much time will be needed and how much it will cost to complete the change.
Manage outstanding invoices.
Invoicing is a key part of the construction firm’s job, as it tells the client when and how to pay your firm. Start by negotiating beneficial terms during the contract process and consider offering discounts for early payments or cash payments. Invoice promptly and according to the contract terms; this will speed up the close-out process so the final invoice can go out faster. Lastly, pay attention to invoices to avoid over- and under-billing. If payments aren’t made on time, follow-up with the client to collect the funds.
Considering financing to free up cash.
Large purchases can quickly drain cash flow. Financing materials for jobs or fixed assets can spread out the deductions from your accounts and potentially balance them with invoice payments.
Construction firms can face cash flow challenges for many reasons, including the nature of the industry, inaccurate bidding, profit fade, or a lack of understanding of cash flow management principles. If you’d like an outside perspective on your cash flow system and tips for improvement, contact us for a consultation and find out how Grimbleby Coleman Advisors & Accountants can help your construction business.