Have you ever started a project, only to realize that you’re short cash to pay for the supplies until your last project pays out? Or, you’re having to move funds from your personal account to cover payroll until the contract money comes in? Effectively managing cash flow is an important part of any business – but especially in construction where the end-product is often delivered well before you’re paid for your work.
Struggling to manage cash flow isn’t a unique position to be in. In fact, a 2018 survey suggests more than 80 percent of construction companies reported having cash flow concerns.
While spending the time to set up some of the systems below, or enforcing them, may sound unsavory, the upfront time investment and a few hours to maintain the work as projects advance will help reduce unnecessary financial stress down the road. Keep reading to learn about the importance of forecasting, contract negotiation, following up on payments, and more.
Create a forecasting model
If someone asked you what your next three projects were and what the outlay and income estimates on them were, could you tell them relatively quickly? Creating a system that allows you to track projects that are completed, in progress, signed but not started, or even just bid on, as well as the various stages of those projects and when you’ll have to outlay cash or have income coming in can give you the ability to forecast these shortage trends and make adjustments to correct the course before a shortage happens. When you’re bidding on new projects, knowing your cash margins will help you make the best bid for both you and your client.
Negotiate the contract
Whether you’re a general contractor, subcontractor, or large firm, it’s important to read through and negotiate the contracts so you’re not in a bind. Go into every project knowing what your profit is going to be, when you need to be paid for different parts of the work, and what payment terms work with your business.
If you need payment for supplies on delivery, negotiate it. If you need to be paid within 30-days of invoicing for the work, negotiate it and even ask for a late payment penalty to encourage on-time payment. Review the contracts and, if it references another contract, review that as well. Outline what can be changed in the scope and the deadlines to make those changes. And lastly, remember it’s ok to say no to a project when the contract isn’t profitable or will put a good kink in your cash flow pipeline.
Close out the project
There’s nothing like seeing your hard work and labor come to fruition. Once you’ve completed your scope of work, make sure to close out the project with the client or general contractor. One of the most important steps during a project close out is to send the invoice to the person who is going to pay you.
Follow up on late payments
Discourage late payments by including a late payment penalty in the contract; much like charging interest on a loan, it highlights the costs of tying up your cash flow for longer than the agreed upon timeframe. If payments still are not made, put together a process to follow up with the payer. You can even set tasks in your phone or email system that remind you to check for payment and follow up. If you’re using an invoice system like QuickBooks or Bill.com, you can configure your invoice settings to send reminders to pay the bill straight to the other party.
Consider back up measures
If you recognize you have consistent cash flow supply concerns or are constantly juggling money to pay for supplies and labor, consider applying for a small business line of credit. This loan can be there as a buffer for payroll until your next invoice payment comes in, or to front the cost of supplies for your next project. Keep in mind, you will be paying interest on any money you’re using from your line of credit.
Minimize your cash-flow woes by taking the time to put in place these best practices. Work with your CPA to put these best practices in place so that your business can withstand future cashflow challenges.