Maintaining a steady cash flow is critical to any construction company. Cash is a key component for success when it comes to launching a new project and keeping it operating. Without proper cash management, the company could face serious complications.
- Lack of free cash can lead to the inability to purchase materials, pay for supplies, and mobilize day-to-day running of project operations.
- A construction business may not be able to pay its bills if it does not have positive cash flow. They will not be able to take on additional work or expand their operations
- Companies that have recurrent cash flow issues are more likely to collapse.
Developing a strategy to maintain a favourable cash flow situation is critical to the project’s success. Implementing adequate cash flow management is also necessary to ensure that a company’s finance stays flexible.
Common Issues with Cash Flows in Construction
Slow-paying clients: When consumers fail to pay their payments on time, the contractor’s cash inflow suffers. According to McGrathNicol Working Capital Report in 2021, construction and engineering companies wait must wait an average of 66 days to be paid for their services. The entity must have more money coming in than going out to have a positive cash flow. However, if clients fail to pay on time, the cash outflow would gradually exceed the inflow.
Delayed invoicing: The longer it takes to charge for the services rendered, the longer it will take to get paid. An automated billing platform, especially one that can manage many types of project pricing models, can be useful in addressing delayed invoicing issues.
Paying bills too soon: While it may appear wise to pay bills as soon as they arrive, it might leave a construction company short on cash, especially if the inflow is delayed. Keeping cash on hand until the bill’s due date provides a company with available money to work with. They can use this as a fund to reinvest, employ a subcontractor, or move on to the next stage of a project.
Lack of upfront payment: Construction companies can spend a lot of costs before a project even starts, especially in terms of supplies and equipment. A construction business can seek to ask the customer for an advance payment to cover part of these procurement costs.
Strategies to Improve Cash Flows in Construction
● Cash Flow Forecast
Cash flow forecasting is the practice of projecting the inflow and outflow over a period of time. Having an effective cash flow prediction allows businesses to foresee future financial positions, prevent catastrophic shortages, and maximize profits on any surpluses they might have.
Detailed and precise forecasting allows construction companies to analyze and control predicted expenses and evaluate the impact of those outlays over time. Budget and resource limits may then be adjusted for more precise and accurate financial decisions using modern project management tools.
● Payment Terms
Payment conditions should be included in all construction contracts. Payment terms, such as 30, 60, or 90 days, specify how long a client has to pay an invoice. A billing agreement should define needed documentation, the specifics of the approval process, and final payment terms to avoid misunderstandings and delays in payment.
● Incentivize Early Payments
Firms can reward their clients while keeping the business healthy by offering early payment reductions. A discount of roughly 2% to 5% is common in the industry. Of course, the trade-off is a reduction in a firm’s earnings, so whether this is a realistic alternative will differ from one organization to the next.
● Negotiate With Vendors
Construction entities can negotiate with their vendors to come up with better terms and supply costs. Many merchants are prepared to partner with other businesses as long as they provide them with something of value, such as a big volume sale.
If a project calls for a large quantity of custom floor coating, construction companies can ask their supplier to agree on lower pricing that is tailored to the project. The supplier will most likely approach and negotiate with the manufacturer, and the three parties may work together to settle on a bargain.
● Consistent Billing
Invoicing is one of the most important parts of managing a company’s cash inflow. It is easy to get into a jam due to expenses, sluggish payments, and the overall nature of the business.
Make certain to deliver invoices as soon as feasible. Payment will almost always be late if invoices are sent late. Having a smooth invoicing procedure can help organize billing schedules and monitor the money coming into the company. Using a project management software like Bizprac Construction Project Management Software. It can generate invoices and set reminders automatically.
● Plan Taxation
Tax-related expenses and activities also affect cash flow. Tax planning and understanding tax deferrals can help construction businesses avoid unpleasant surprises. To keep track of spending, industry leaders recommend adopting a cloud-based tool. It will not only keep the managers and workforce informed, but it will also record all work-related costs and make taxation simpler.
● Investing in Construction Project Management Software
Using cash flow management software is one method to organize the jobs, resources, and finances altogether. These modern tools enable proper financial planning and help avoid unfavourable situations.
Construction management software like Bizprac allows firms to achieve the following benefits.
- Approach Payroll Correctly
- Send Automated Invoices Immediately
- Accept Electronic Payments
- Improved Cash Flow Management
- Avoid Over- and Underbilling
Bizprac – The Software for Builders
Bizprac is an Australian-owned and operated construction management system designed specifically to support the Australian construction industry. It is a fully integrated and constantly developing software system that offers comprehensive features like estimating, accounting, job costing, single-touch payroll, purchasing, builder retentions, etc. Bizprac is designed to ensure users make the maximum profit on each project. It is also backed by an industry-leading Australian-based support team that knows the industry inside and out.
Request a free trial today or contact us at firstname.lastname@example.org to get in touch with one of our team members.