Cash flow is crucial to running a construction business and acts as fuel to smoothly drive the engine of construction companies. From paying the workers to investing in the materials, lots of things depend on cash flow.
With the right cash flow management, you can lead the construction game and rule the competitive market. The better your cash flow management, the greater your flexibility to undertake high-end constructions that will attract VIPs and high-paying customers. However, investors always keep those construction companies as their first preference and manage their cash flow impressively. Here, Brick&Bolt will help you understand cash flow management in construction.
About Cash Flow in Construction
Cash flow means the inflow and outflow of funds at every step of the construction process, from installing the equipment to paying the staff involved in the process. It is important for the construction site managers and owners to keep cash flow as the top priority to drive the success of the construction project.
Constructing building a long way process and demands lots of funds. When you keep track of every transaction, you can keep up with the budget without compromising on the quality of the construction.
Importance Of Cash Flow In Construction
Cash flow management continues to play an important part in leading success for your construction project. Here are some of the important reasons that showcase the importance of cash flow in construction:
- Completes projects on time
Most project managers do not realize that cash flow management plays an important role in ensuring the timely completion of projects. If you do not maintain a suitable cash flow level, you may compromise the construction, such as stopping the project due to a shortage of funds.
With the right cash flow management, you can predict and identify the flow of cash, which ensures that all your construction bills and expenses are paid on time. Hence, you can avoid delays caused by labor or material shortages. Additionally, it helps you meet your payroll obligations.
- Enhances financial health
It is not possible to engage in new construction projects with 100% confidence unless your current construction cash flow is on course for the existing projects or for the whole company as a whole.
- Maintains good relationships with suppliers
As you build your construction business, you must maintain a positive cash flow to pay all of your vendors and suppliers’ bills on time. This will serve as a basis for future collaborations and ensure the smooth execution of the project.
Construction Cash Flow Calculation
How have you calculated construction cash flow? For your convenience, here is a quick reference formula:
Cash Flow = Cash Inflows – Cash Outflows
To run a successful business, you need this value to be positive.
Among the cash inflows are:
- Upon completion of milestones, clients make progress payments
- Upon completion of the project, retention percentages are released
- Salvaged materials sales
Among the cash outflows are:
- Purchases of materials
- Costs of labor
- Rental and maintenance of equipment
- Fees for permits
- Costs of overhead
Top 12 Strategies To Improve Cash Flow in Construction
- Use of Cash Flow Management Software
The projection of your future cash flow is not an easy task. The construction industry is more complex owing to the variety of jobs and the changes that must be made to meet current project requirements. It is possible to accomplish this by using a cash flow management software program.
It is possible for construction companies to use these tools to get a better understanding of how their future income and expenses will be compared to those of the past. By planning, you will be able to avoid these events.
- Payroll Management
The construction industry is different from most other businesses. There is almost an every-other-week pay cycle for construction workers. To improve cash flow, subcontractors can be hired. It is common for them to be paid every four weeks. If possible, avoid doing this under any particular circumstances.
Permanent employment and working full-time improve employees’ ability to deliver results on time. The higher the quality of work, the less likely you will run into setbacks or accidents during the project, and the more likely you will be referred by your current clients and asked for repeat business.
- Spread the cost to improve cash flow
If you receive a significant discount on materials and supplies, don’t use cash to purchase them. Financing should be used instead for these purchases. Suppliers offer contractors various financing options, such as credit cards, lines of credit, and loans. Finance charges and interest will still apply.
Payments can be made regularly, so you don’t have to pay the entire amount upfront. The more cash you have available, the more likely your business will be able to continue operating. If you charge interest and other fees to your business, you may be able to deduct them.
- Compare prices
It is always a good idea to compare suppliers so that you can be sure you get the best price. There is no doubt that every supplier wants your business in order to stay in business. If the supplier knows that you are looking for the best deal, he or she will most likely offer you the best deal to meet your needs. As a result, you’ll be able to save money.
To boost your cash flow, shop around for the best deals when purchasing supplies and materials. Pay with a credit card rather than cash when making purchases.
- Change in Activity orders processed quickly
It is common for change in construction activity orders to be issued in construction. It often results from a project needing more resources, time, or money than expected. Weather extremes can also be a factor. As soon as the project manager receives a change order, he or she should process it instead of waiting for the project to be completed. Cash flow will be positively impacted by this.
- Automatically send invoices
Invoicing can take a lot of time. Your company’s cash flow depends on it. Manually writing invoices is still possible, but you’ll save time by using software. It is important to send all invoices electronically and as soon as possible. Getting your invoices out beforehand will help you maximize your cash flow.
- Accept electronic payments
Cash is the king of payments, but it’s also important to occasionally accept electronic payments. This method can increase cash flow, payables, and capital for growth and day-to-day operations.
- Training the Project Manager in Cash Flow Management
The construction industry generates about 85% of its cash from the work being performed on projects currently in progress. Therefore, the success of cash flow management depends on the effectiveness of cash flow management. Furthermore, you can also offer training and incentives based on the performance of the cash flow of the company. It is highly likely that this will be successful.
- Avoid overbilling and underbilling
Some project managers enjoy the pastime of overbilling. Essentially, this means that the invoice will be larger than the job has been completed, resulting in a higher cash flow for the company. It will also reduce cash flow at the end of the project. If a company underbills its clients, it will negatively impact its cash flow in the short run. Is there a better way to go about this? Billing according to how much work has been done is the best way to do it.
- Strive for outstanding day sales
Having a goal can greatly increase your chances of succeeding in your endeavours. For construction projects, it usually takes 60 to 90 days for the money to be received. As a realistic objective, it might be a good idea to set a goal of reducing that time to 50 days.
The easiest way to do this are-
- send invoices to non-paying customers immediately,
- provide incentives for them to make payments,
- write clear terms of agreement,
- run credit checks before making any deals,
- renegotiate terms with non-paying customers.
Because each project is different, construction companies differ from other businesses. Different strategies can improve cash flow. The project manager will have a significant role in managing cash flow effectively.
Therefore, current project managers must be trained in cash flow management or be hired as qualified project managers. Increasing cash flow in construction companies is possible through good project management and improving receivables’ speed.
Conclusion
To witness your construction project touching height, always keep cash flow as the top priority. Besides that, do not forget to take your walk towards choosing the best construction company to give reality to your construction concept.
Brick&Bolt is the best construction company in India, always ready to shape your construction project. We have a dedicated team of real estate builders who will sit with you to understand your construction requirements and build the best space that meets them.
From residential to commercial construction, we build the best space for you to adhere to the top-of-the-line quality standards. Contact us today to shape the best construction for you.