Cash Flow In Your Construction Business: What it is, why you need it, and how to achieve it

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Your construction business is most likely used to late payments and never-ending project changes. This means that your business may encounter cash flow issues from time to time. 

In this article, you will learn the importance of consistent cash flow for your construction business and how to ensure it. 

What is cash flow?

The movement of all money and cash equivalents transferred into and out of a company. Cash inflow can include income from sales, investments, rentals, royalties, and interest whilst cash outflow is represented by any money being spent by a business on expenses. Evaluating your construction business’ cash flow allows you to understand your company’s liquidity and overall, your company’s financial health. 

Positive cash flow represents a net increase in your business’ assets and allows you to invest money into expanding operations, a larger workforce or new, time-saving equipment.

What Is The Importance Of Cash Flow In Your Construction Business

What is the importance of cash flow to your construction business?

Meeting project deadlines is undoubtedly the most important duty to be fulfilled by a construction business. Although construction projects are layered and complex, meeting deadlines keeps home and property owners happy, allows your business to have a faster project turnover rate, and keeps you on good terms with your subcontractors. All of this leads to increased profit and improved operational efficiency. 

However, having money on hand to pay for the large unexpected expenses that more often than not appear midway through your project is key to ensuring that your deadlines are met. This is why having a positive cash flow is fundamental to your construction business’ ability to meet deadlines and grow towards success.

what affects cash flow in your construction business

What could affect your cash flow on a construction project?

The construction industry faces more issues regarding cash flow than almost any other. These are the top 5 reasons why your construction business could run into cash-flow issues:

1. Slow inflow of money:

This can be due to many reasons. The most common ones are: 

  1. Slow-paying customers. The average contractor has to wait 90 days for payment from their client.
  2. Delayed invoicing. We recommend progress invoicing where your clients are invoiced consistently throughout a project as opposed to receiving payment in the form of a lump sum upon the project’s completion.

2. Inaccurate budgeting:

Your accounting ledger can very easily sway from profit to loss from surges in hidden costs. 

Keeping track of, and predicting unforeseen costs through the use of accurate budgeting and cash flow forecasting will help you minimise rainy days.

3. Overstocking Inventory

Although inventory will eventually be used, purchasing too much of it too quickly will decrease your cash in hand and could cripple your company’s liquidity. 

Knowing how much inventory to stock at the start of a project limits the amount of equipment and consumables you’ve spent cash on and it limits the amount of storage space your company requires. This improves cash flow and increases profit margins too.

4. Material shortages:

Inversely to point three, not purchasing sufficient materials and equipment can also hinder your cash flow. A deficiency in the required inventory can lead to project delays and increased costs. 

This means that invoices to clients will have to be delayed whilst still having to pay subcontractors timeously.

5. Detrimental contracts:

Lenient contracts may seem beneficial when convincing a client to agree to a project however, they may be to the detriment of your cash flow as the project proceeds. 

It is important to include consistent payment terms, incentivised early payments, and limited retainage. If you believe that it is in your company’s best interests to offer retainage in your contacts then make sure that you budget for it accordingly.

5 Ways to manage and improve your construction business cash flow

5 Ways to manage and improve your construction business’ cash flow:

1. Improve your accounting practices

You can’t manage your cash flow if you don’t have a clear overview of your finances. 

We recommend creating organised financial processes, investing in trusted accounting software and hiring a proven, experienced accountant to manage our construction business’ financial operations.

2. Work out mutually beneficial contracts for yourself and your client

Without being too lenient, if your contacts suit your clients you’re more likely to be paid on time or even early. 

Offer your clients multiple ways of paying you, incentivise early payments, define the number of days after receiving an invoice that a client has to pay you, and enforce these payment terms.

3. Research your potential clients

By carrying out due diligence before you onboard a new client, you can ensure that you only enter into working contracts with clients with proven repayment and credit records. 

Here you can learn how to access the creditworthiness of any potential new clients. Alternatively, don’t hesitate to reach out to our team and ask how we assess the creditworthiness of our new clients.

4. Be proactive

We know how susceptible the construction industry is to change so instead of letting it affect your cash flow, rather plan for it and react immediately. 

By initiating your change order process as soon as a hurdle or delay is incurred you can reorganise your purchasing and payments to ensure that you still have cash on hand.

5. Obtain business funding for your construction company:

There’s no easier way to improve your cash flow quickly than by getting a loan from a lender. 

Depending on the assets you have to offer as security, your construction business could qualify for a range of loans from business loans to bridge financing. A loan offers your company quick access to improved cash flow and bespoke loan structuring such as that offered by Geddes allows you to retain positive cash flow even whilst paying back your loans.

Consistent cash flow ensures that you can pay for labour and materials, improves stakeholder relations, and optimises operations and credibility with lenders. With the information in this article, we hope your construction business reaches its full financial potential. If you have specific questions or would like to discuss cash-freeing financial solutions, get in touch with our team.

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