Construction is an industry where managers often deal with enormous upfront costs and long project timelines, making cash flow management tricky.
Companies in construction should be on the lookout for current trends that will affect their cash flows. With the adoption of a new lease standard called ASC 842, for instance, companies should now include all operating and financing leases on their balance sheet. This will ultimately impact their equipment leasing operations and need additional planning to reorganize their cash flow statements.
Cash flow or the amount of money moving in and out of your business can be unpredictable. So it’s essential to be proactive and take steps to ensure that you have enough money to pay your employees and keep your business running smoothly.
This blog post will share ten ways to manage and improve cash flow. By following these tips, you can ensure that your business stays on track financially and continues to grow!
Cash flow is the difference between cash coming into your business and money going out. It’s the fuel that keeps the engine running, so you have to keep it steady or risk not covering daily operating costs.
Positive cash flow means that your construction business stays in the black, and you have enough cash to cover your monthly expenses. While having negative cash flow means you cannot keep up with your monthly fees and face the risk of debt.
Being in the red for long isn’t recommended if you want your business to succeed. So how can you ensure that you stay on top of your financials and improve your cash flow?
Here are ten ways to make positive changes to your construction cash flow and burry those negative cash flows to rest!
Cash flow management can be challenging for construction companies since various roles are being monitored, and multiple projects are being handled over a period of time.
Luckily, by introducing innovations in software, construction companies can now use cash flow management software to keep a close eye on their spending habits and make the necessary changes to avoid financial blunders.
These tools can help you generate accurate cash flow statements to understand your income and expenses better and help you avoid potential payroll problems.
Though it might seem tempting to take cash out of pocket because of its convenience, it’s best to leave this type of payment option for minor expenses.
If you want to buy supplies and materials or pay for equipment leasing, ensure you go for business credit cards, lines of credit, or other types of business loans. These types of financing options provide you the chance to make regular payments and not pay the total amount upfront.
Acquiring financing through loans includes interest rates in addition to the amount borrowed. But you may even have the chance to write off these interest rates as business expenses. By taking care of your higher costs, you’ll have more cash in hand to cover your operational fees or emergency expenses.
As soon as you get an order, look for ways to reduce your expenses on supplies and materials. For example, buying bricks in bulk can reduce costs significantly compared to purchasing them one at a time.
You may also want to consider shopping online for discounts. There are many websites where you can find quality materials at reasonable prices. It would help if you made some comparisons before making a purchase.
When negotiating prices with suppliers, you can mention that you’re shopping for the best deals. This way, you can get better deals on your purchases, reduce your costs and see more positive results on your cash flow statement.
Construction businesses that want immediate results on their short-term projects can employ subcontractors. Since subcontractors are not full-time employees and are typically paid every four weeks, you can use them for special situations when you’re low on money and need that positive cash flow.
While subcontractors can be beneficial, remember that employing full-time workers is crucial to keep your business alive since these workers are the main artery of your company. With their help, you can decrease the likelihood of project setbacks and onsite accidents and increase the number of referrals and new clients.
When managers see that a project will take more time than initially planned, they must quickly arrange a change order.
Change orders are documents that request changes regarding the initial contract set between parties. They are quite common in construction and might happen for many reasons, including weather conditions, problems with the supply chain, or inaccurate construction calculations by designers.
They typically include the following documentation:
Generally, construction companies should do their best to avoid change orders as much as possible since it results in additional time and higher costs.
Sometimes, you may notice that payment requests and invoices tend to pile up. And when you want to pay for your operational costs, there’s a possibility that you won’t have enough cash to pay for it.
Automate your invoices through purchasing software and request payments to solve this problem. This will ensure you get paid as soon as possible. If you want to maximize your cash flow potential, send invoices ahead of time.
A construction company dealt with colossal paperwork and cash payment in the old days. But in today’s technology-driven world, there are many options for clients to pay you electronically. Besides that, almost every contractor accepts electronic payments these days.
Many full-service accounting firms can help you set up an online payment system for your business. They’ll be able to link your bank account with the payment processing system so clients can transfer money quickly to your business account.
It’s essential to educate your project managers on how crucial cash flow is to the continued success of your construction business. They should know how to manage money and take steps to ensure that their projects don’t go over budget.
You can offer incentives to project managers who successfully meet their budgets. For instance, you can give them a cash bonus at the end of each completed project. This serves as an encouragement for your staff to remain committed and responsible when managing cash flow in their projects.
It’s best to avoid the tendency of overbilling or underbilling clients. Though overbilling might improve your current cash flow, it’s not a good practice for the long run. If you’re sending frequent bills at least 10 percent higher than they should be, you’ll end up with limited cash flow because your clients are already sensitive about their spending.
Underbilling can also negatively affect your construction company’s cash flow since you’re not giving your hard-earned project its true worth. So if you’re not that good when estimating bills, hire professionals who can help you out. You can also work with your financial team or accountant to develop a more accurate estimate.
The odds of success significantly increase when it comes to construction if you set a goal. The average number is between 60 and 90 days; however, your chances can be reduced to 50 days!
This would mean sending invoices immediately or offering payment incentives to achieve this time frame. You should also check credit reports before making any deals and restructuring your terms with non-payers.
Construction companies operate differently from most businesses because no project is the same. This means that improving cash flow requires different strategies, depending on the type of construction project and how much time it will take to complete it.
A lot will depend upon whether or not a project manager has good management skills to perform a cash flow forecast. If your current manager needs more training, you can offer comprehensive training courses about managing finances wisely so they can help your business run successfully!
To stay on top of your cash flow, you need a reliable application to automate your time and attendance systems. Such systems like MobiClocks’ advanced time and attendance system can generate accurate payrolls, effectively reduce labor costs and improve your cash flow.
To better understand how MobiClocks works, request a demo, and we’ll show you how it can help your business grow!
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