The United States spent over $1.23 trillion in both private and public sector construction in 2017. There’s no doubt that the construction industry is booming. But the same cannot be said about new and growing construction companies. Startup companies are no strangers to the challenges of running a new business. But there’s one common problem new business owners face: proper cash flow management. If your problem is the lack of working capital, applying for construction financing can help solve your problem.
However, if managing available cash flow is the issue, here are five tips on how to properly manage cash flow for your construction projects:
1. Spread Out Payments
It’s better for construction companies to use a business loan to pay for materials and supplies, rather than buy them with cash. You’ll need to pay the interest on your financing, but you’ll be able to spread your working capital, leaving you with more funds to use on daily business operations.
2. Make a Cash Flow Forecast
Before starting any project, it’s best to create a cash flow forecast based on the length of the project, the amount of work needed to be done, and the billing amounts. You will also need to factor in vendor and sub payments so you remain on top of your working capital. Compare the forecast you made to actual receipts and disbursements. Din this will help you improve your future forecasts.
3. Create Accurate Estimates
By making accurate estimates, it’s easier for you to forecast and track the project’s cash flow. You can use estimating software to get the most accurate numbers possible. Construction professionals, such as surveyors, builders, estimators, and contractors can also use the software. Depending on the platform you choose, you can save all of your pricing details in one place. By doing this, you’ll have all of the information you need whenever you need it.
4. Develop Your Project’s Billing Process
Under-billings is one of the main reasons why construction companies experience cash flow problems. This usually happens when you aren’t paid as much as you should have been for a project. Poor billing procedures may be to blame for under-billings. Fortunately, you can improve your billing process by using applications and other financial tools to accurately track your billings throughout the length of a project.
5. Only Work on Profitable Projects
This may seem like a no brainer, but many contractors make the mistake of working on a project that’s not even profitable in the first place. For this reason, start every project with a realistic estimate and decline the ones that aren’t worth your time. Cash flow management is challenging enough on lucrative projects – even more so on unprofitable ones.
6. Manage Your Taxes Effectively
No likes surprises when tax time comes. By effectively managing your taxes, you’ll be able to easily spot issues that need to be addressed. Costly and unforeseen tax payments can negatively affect your company’s cash flow. This is especially true for construction companies that need sufficient cash to start new projects.
It pays to have a strong accounting department to help you with your taxes. But if you don’t have one, you can partner with accountants or firms with construction experience.
7. Educate Your Project Manager on Proper Cash Flow Management
Around 85% of cash in a construction project comes from the work-in-progress. This means that the cash flow performance depends on how your project manager manages the finances. With that said, project managers need to be trained on proper cash flow management. To make it more effective, you can introduce incentives based on cash flow performance.
8. Don’t Hesitate to Collect Payments
Many contractors hesitate to collect payments. But delayed payments can cause a huge dent in your cash flow. Don’t think twice about asking for payments on completed projects. On the other hand, if you want to get payments for accounts receivables in less than 40 days, be sure to have all the paperwork needed and submit it to the correct people to avoid delays.
9. Have a Cash Cushion
Ideally, every company should have a cash cushion for unforeseen or last-minute expenses. Otherwise, you may have to use your personal savings or borrow money to bridge cash flow gaps. Construction financing from banks and alternative lenders are available for contractors in need of financing. There are different types of loan programs depending on your need, such as SBA loans, business lines of credit, business term loans, and more.
Construction Financing for Small Businesses
The construction industry is capital-intensive. While the returns are great, business owners need to have working capital in reserve while working on a project. Construction financing can help bridge cash flow gaps by providing you with working capital as you wait for your accounts receivables to be paid.