Cash flow is crucial to the success of any business, and the construction industry is no different. Everyone enjoys it when cash flows in, and it's obviously a problem as businesses run out of cash.
According to a survey in 2021, among 764 construction professionals in the US, have come up with some worrisome conclusions. Cash flow problems diminish profitability by 47% and delay projects by 33%. 30% of contractors have no choice but to get loans. 97% suffer anxiety as a result of late payments and cash flow issues. To solve these problems, we must first identify cash flow problems even before they arise. This article will discuss 6 cash flow issues that may arise in the construction industry.
TABLE OF CONTENTS
Overspending on many projects
The construction business, as is often known, operates on a project basis, allowing owners to take on as many or as few jobs as they want. For this reason, many construction owners are attempted to take on many projects. Sooner or later, taking on too many projects at once might cause cash overspending. As we all know, more jobs mean more money. Yet, it's hard to tell if a profit is earned because of the way construction cash flows are structured (no matter how many projects you have). Therefore, make sure your cash flows for each project are well-managed.
Failing to set advanced payment
One of the quickest ways to get into money problems is to begin a project before agreeing on advanced payment. The whole cost of the project, including materials, labor, and overhead, should be accounted for in your bid. You are setting yourself up for potential troubles if you do not include an initial payment in your contract.
Slow-paying consumers prevent contractors from completing a job. It may have a cascading impact on a company's cash flow when a payment is not paid on time. Owners must pay some fees, for instance, even if the payment has not been received. Subcontractors, suppliers, and materials costs are examples of these expenses. The most source of cash flow problems for contractors in the construction industry is undoubtedly slow payments.
High payroll expense
Most construction projects overrun their allowed budgets due to excessive salary costs. If your company has a high reliance on weekly or biweekly payroll, as can be the case with labor-intensive work, you may run into cash flow problems. As mentioned, the negative cash flow caused by late payments has a direct effect on payroll. You can't tell your employees that they won't be paid until their customers pay their bills, since it would be bad for morale and business.
Mismanaging change order
Change orders are official changes to a project's scope of work; poor change order management may hurt cash flow. Change orders are not any less of a pain to deal with just because they are so common in construction procedures. Most of the time, a change order changes the scope of a project and adds costs to finish it. Without the right paperwork and billing for change orders, you could end up trouble with the cash flow and not getting paid enough.
>> Read More: How to Manage Construction Cash Flow
>> Read More: 6 Key Construction Accounting Best Practices
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Budgeting for incorrect retainage
Retention is typical in the construction industry, particularly for large, expensive projects that take a long time to complete. Retainage, or retention, refers to money that is kept back until the completion of a project.
Cash flow is negatively impacted by inaccurate retention on projects. Less money comes in as the retention amount increases. For contractors, retention means they won't get paid in full or on time, which can hurt their cash flow a lot.
The bottom line
When spreadsheets and other old tools are used to manage cash flow in the construction business, these cash flow problems may happen more often. If you have too many spreadsheets, you won't be able to get real-time information to help you make better decisions or deal with possible cash shortages. If you need a team of bookkeepers who are experts in the well-known construction system Sage 100 Contractor, contact us so Irvine Bookkeeping can get you involved, give you advice, and discover the financial answer you need.