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How to Manage Construction Cash Flow

Updated: Jan 12

Let's take a look at some cash flow tips that construction owners can put in place to strengthen their company's cash flow. This article will assist you in making an active change in your cash flow management to get better results.


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TABLE OF CONTENTS


Last time, we talked about some common cash flow problems that can happen in the construction business. In this article, I will summarize some common cash flow problems:

+ Failing to set advanced payment

+ Slow-paying customers

+ High payroll expense

+ Mismanaging change order

+ Budgeting for incorrect retainage

If you are in business and painfully aware of these construction cash flow problems, then this post is for you.

Follow your books closely

You must acknowledge how each project affects your budget as a whole. Reliable financial reports are necessary to determine where its cash flow is healthy and where it needs help. Unless you measure it, you can't manage it.

For example, a report on accounts payable can help you find old bills that are charging you interest. A report on accounts receivable shows which customers are slow to pay, so you know who to call or which jobs to lien. A cash flow forecast tells you when you could run out of money so you can repair the problem before it hurts your business's bottom line.

Also, business leaders need real-time construction cash flow analysis. Actual financial data enables you to determine your overall financial health. That way, you'll be able to make smarter choices that will ultimately benefit the company. Accounting software is now designed to better cash flow management in construction projects. With accounting software, you can keep a close eye on your books and have the information correct and up-to-date.

Set accurate estimates

Using your estimate, you should be able to determine how much cash you will need for cash flow projections for owners on a construction project ahead of time. The more accurate your estimates, the more accurate your cash flow forecasts will be. The better your cash flow forecasts are, the better your cash flow will be in reality.

Invoice quickly and accurately

You need to send out invoices quickly and correctly if you want to get paid in full and on time. An invoicing schedule is required to avoid payment delays. To save time and effort, you can either set up an automated invoicing system or hire a bookkeeping service to handle billing and payments on your behalf.

Keep payments on track by sending in your invoices on time and including all reference documents as specified. Confirm that your customer received your invoice(s), then check a week later for any concerns.

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Foster early payment

Making it easier to pay an invoice can speed up the process. Many businesses prefer credit card payments, especially for substantial transactions. You can set up merchant services to accept these types of payments with the help of your accounting software or bank. There is a fee for each transaction, but it might be worth it to get your money faster.

You can also offer 2–5% discounts for early payments to encourage your customers to pay quickly. However, the discount should not be so substantial that it badly affects you if your customers overuse it.

Process change orders as soon as possible

Keeping track of the change orders for your project is a sure way to avoid any unpleasant financial surprises.

Change orders and extra costs should be approved as quickly as possible so that you can start billing for them and get paid as the money is spent.

If you don't charge until the job is done, you won't have enough money to pay for extra costs as they come up.

Enhance payment terms

You must negotiate the best contractor payment terms before you start a project. Get the best prices and terms from all your suppliers while you can. Talk to your suppliers about how you can get the best deal, such as by buying in large quantities.


Establishing good accounting and financial practices


Establishing good accounting and financial practices is a fundamental solution for effectively managing cash flow in construction projects. By implementing robust systems, construction firms can track expenses, monitor cash flow, and maintain accurate financial records. This enables informed decision-making, timely invoicing, and effective payment collection, ultimately improving cash flow. Additionally, proper budgeting, expense management, and financial reporting help identify potential areas of improvement and enable proactive measures to stay on track financially. By establishing strong accounting practices, construction firms can also ensure compliance with tax regulations and avoid penalties. Maintaining good relationships with suppliers and subcontractors further enhances cash flow project management. Overall, by prioritizing good accounting and financial practices, construction companies can optimize their financial operations, maintain a healthy cash flow, and set a solid foundation for long-term success in the competitive construction industry.

Avoiding over and under billing

Avoiding over and under-billing is a critical aspect of effective cash flow management in the construction industry. Accurate and timely billing is essential to maintain a healthy cash flow. Overbilling can strain client relationships and lead to payment delays, while underbilling can result in cash flow shortages. By implementing proper systems and practices, construction firms can ensure accurate billing that reflects the work completed and aligns with project milestones. Regularly reviewing project progress, tracking expenses, and maintaining clear communication with clients helps avoid over and under-billing. It is important to establish transparent invoicing procedures, adhere to contract terms, and promptly address any billing discrepancies. By achieving a balance between accurate billing and timely payment collection, construction firms can optimize their cash flow, strengthen client relationships, and enhance overall financial stability. >> Read more: Discover Cash Flow 101 for Construction Businesses


The bottom line

By keeping a close eye on your books and making accurate estimates before each project, you can start with cash flow improvement. Avoiding late payments is another approach to maintaining a healthy cash flow. You can do this by sending invoices quickly and encouraging early payment.

Other ways to maintain good cash flow management are to process change orders quickly and to negotiate with vendors before starting a project.

Looking for an expert in bookkeeping who knows the construction business? Contact the Irvine Bookkeeping team for the best help. Schedule a FREE consultation to find out how we can help reduce your financial stress by improving your construction cash flow management and invoicing process.

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