How construction firms can prepare for cash flow challenges in 2021
The construction industry has faced unique and varying challenges a result of the coronavirus pandemic, but the restarting of projects and improved processes have put the industry on more comfortable ground to close out 2020. However, keep a weather eye on the horizon as issues could re-present themselves is in 2021 as marketplaces continue to adapt and shift in the turbulent economic climate and therefore impact your construction firm’s cash flow.
In this article, we’ll take a look at what challenges the construction industry could face in 2021 and how to manage your construction firm’s cash flow to account for these challenges.
Challenges facing the construction industry in 2021
As the world adapts to the new normal, so has the construction industry. But, it’s safe to say things will not be going back to the way they were for some time. The construction industry will continue to face challenges in 2021 in the following areas:
- Labor – Finding skilled labor was a challenge for the industry before the pandemic began and will continue to be an issue.
- Backlog shrinkage – Projects may be back up and running, but the backlog isn’t being added to resulting in an oncoming shrinkage.
- Falling costs – A competitive marketplace means contractors are having to get frugal with costs in order to obtain contracts.
- Fewer projects – The commercial sector has been affected by work-from-home transitions and stalled projects in medical facilities, event venues, and travel and hospitality.
- Increasing prices – As demand increases, so do prices. Supplier networks are fractured making some products hot commodities.
- Slower supply chains – As mentioned, supplier networks are unstable, and contractors will need multiple suppliers on hand in order to stay on top of timelines.
- Less state and local government revenue – For contractors with significant government business, projects have halted or scaled back, threatening revenue especially into 2021 for projects not started.
Each of these challenges plays a part in a construction firm’s cash flow projections for 2021. But proactive adjustments can be made to withstand these potential challenges.
How to protect and preserve cash flow in the face of challenges
- Start with a projection – Work with your CPA to line up your projects for 2021, identify potential problem areas either with labor, supplies, or costs, and lay out a projection for your cash flow for the year. This way, you don’t enter the year blind.
- Have a plan for costs – Look into financing options for supplies versus paying in cash. This can protect your cash on hand, and you can potentially write off the interest and fees for financing. Don’t negate the impact of shopping around as well. Suppliers will still be disrupted so have multiple options available.
- Manage payroll and staffing properly – Subcontractors can help improve cash flow as they are often paid on a monthly basis versus every two weeks. However, carefully consider where to use subcontractors versus your own employees – don’t let quality be implicated.
- Adjust your administrative processes – Quickly processing change orders, automating invoices, and setting up electronic payment options will go a long way in improving your cash flow in a difficult year. Avoid income delays by all means possible and set goals for reducing the number of days it takes to get paid.
- Carefully manage over and under-billing – While it may seem like a solution to your problem now, over or under billing can cause issues for you down the road no matter which path you take. Stick to billing for what is actually completed for a more accurate picture of your cash flow over the long-term.
- Train your team – If your project manager isn’t up to speed with your cash flow management strategy, it’s time to get them there. They are on the frontline of the project, and cash flow performance often lies in their hands.
- Stay true to your value – While the market is competitive, don’t reduce your fees just to win business to the point where your profitability is threatened.
With careful planning and management, your construction business can withstand future cash flow challenges in 2021. Work with your CPA to setup a plan – They can help with much of the backend work so you can focus on keeping your projects moving.