7 Tips for Cash Flow Management for Construction Projects
There are many aspects to a construction project and a lot of moving parts. In order to ensure a project gets done on time, make sure you are in control of the cash flow of your project. It is imperative that you maintain control of your cash flow. If you do not, you will never make it to the “final” stage of your project.
Here are 7 tips which can help you to understand how to manage your cash flow.
Cash flow is a problem for construction firms.
Cash trickles down from the property owner or lender to the lowest-tier subcontractors and suppliers on a building project. With each step away from the top of the payment chain, payments get progressively delayed. In general, contracts push the risk of late payments below, as opposed to up the payment chain. Therefore, contractors struggle to pay their staff and suppliers, let alone generate a profit.
Discovering where your money originates and travels can be an enlightening experience. Most business owners are only concerned with the company’s operational activities. They may be oblivious to the fact that decisions such as financing purchases and selling assets can also affect the daily cash flow.
Let’s take a closer look at cash flow management, construction sector difficulties, and potential remedies.
Understanding cash flow management
Cash flow management is the act of monitoring expenses and income to control the flow of money into and out of an organization. It involves analyzing your construction company’s current cash flow reports, your projections for future cash flow, and basing business decisions on this information.
Cash flow is the pocketbook of your business. When you examine the cash flow of your business, you chart when and how much cash comes in and when and how much cash goes out. The timing of these transactions might significantly impact your company’s financial condition at any given time.
Tips on how to manage your cash flow
1. Implement sound accounting and financial practices.
Every construction firm requires the proper accounting reports and financial records in order to determine where their cash flow is healthy and where it requires assistance. Ultimately, you cannot manage what is not measured.
It is not sufficient for businesses to know how much money they have in the bank. You must be able to swiftly determine how each project on your books impacted your overall cash position.
2. Know Your Customer
You want to collaborate with owners or contractors who can process your paperwork, approve completed work, and pay promptly. Check the creditworthiness of your prospective client by obtaining a financial statement, a Dun & Bradstreet report, or at the very least, references from contractors who have previously dealt with this owner. You need confirmation that they have the financial means to compensate you for the services rendered.
3. Safeguard your company’s mechanics lien filing rights
Every owner of a construction company is concerned about the possibility of nonpayment. A mechanics lien is one of the most effective instruments available to construction companies to ensure that they are always paid on time.
Due to the fact that each state has its own mechanics lien laws and standards, it is crucial that someone in your organization keeps track of the many rules and deadlines. Ensure that your payments are protected on each project by sending preliminary notices when you begin work, a notice of intent to lien when payment is late, and a lien claim before the deadline.
An important aspect of controlling cash flow in the construction industry is collecting earnings as promptly as possible. Businesses that implement a stringent mechanics lien policy are able to recover payments more quickly and with less effort than those that protect only a subset of jobs.
4. Negotiate Advantageous Contract Conditions
Ensure that the payment terms and timing are favorable to your organization.
You desire a billing schedule that reflects the upfront expenses of project mobilization, such as payment for supplies upon delivery to the jobsite as opposed to when they are installed.
Work with your vendors and subcontractors to plan their payments either on a paid-when-paid basis or within a few days of the anticipated receipt of funds from your clients.
Try to reduce retainage as the project advances or phase it out using performance bonds.
5. Be Aggressive in Payment Collection
You desire to reduce your accounts receivable to 40 days or less. Ensure you have all the necessary documentation and present it to the appropriate individuals to avoid payment delays.
Do not hesitate to request payment for work that has been finished, inspected, and approved.
6. Whenever possible, finance purchases of fixed assets
Cash flow-wise, it does not make sense to give away all of your cash to avoid paying interest. By making smaller payments over time, you are able to free up cash each month for needs like payroll.
Another advantage of financing goods is that you improve your credit score. This rating is useful when applying for a short-term loan or other company finance.
7.Closeout the Project
It can be challenging to conclude a job and receive final payment. Effectively managing the final punch list helps expedite the final payment and prevent reductions in retainage.
Conclusion
Cash flow management is one of the most important aspects of running a construction company, which is why we want to share with you some of the best ways to ensure that you never find yourself in a cash flow crisis. These tips can help you manage your cash flow for all your construction projects.