Cash flow is a major concern for most construction firms. When cash is low, it could mean being unable to make payroll or purchase supplies for an upcoming project. If that happens, there is more than the immediate profit at stake; you can damage your firm’s reputation and success. These tips can help you understand how to manage cash flow throughout the year to protect your construction firm.

Be aware of challenges to cash flow management.

As a construction firm, there are additional complexities to managing cash flow that other industries may not have. Firms juggle multiple projects simultaneously, including schedules, budgets, contract requirements, and payments. Late payments are also something to be aware of. In 2021, 71% of construction businesses reported taking out a lien to get paid for work completed.

Be selective in your bidding process.

Bidding on all projects available can be tempting to bring in more business. Not all jobs are created equal. While some will make your firm more than others, you should avoid projects that are not estimated to be profitable altogether. When bidding, ensure you’re creating accurate estimates for the cost of the work rather than using a rough estimate. Also, be cautious when bidding work with new clients, on different types of projects, or in a new location, as there may be unknowns that could cause profitability and cash flow issues in the future.

Protect your firm from profit fade.

While profit fade may not be avoidable, you can limit this phenomenon by doing accurate job costing and efficient change order management. Accurate job costing is simply understanding the exact costs of doing the work for each job. Change order management involves tracking changes made to the scope of work throughout the job process. Change orders should be created and signed by the customer before any changes to the job occur. Doing so will put the client and firm on the same page about how much time will be needed and how much it will cost to complete the change.

Manage outstanding invoices.

Invoicing is a key part of the construction firm’s job and starts by negotiating beneficial terms during the contract process. Consider offering discounts for early payments or payments in cash. Invoice promptly and according to the contract terms and speed up the close-out process so the final invoice can be submitted timely.

Considering financing to free up cash.

Large purchases can drain cash flow quickly. Financing materials for jobs can spread out cash outflows and potentially balance them with invoice receipt payments. Also, financing equipment and other fixed asset additions can assist with cash flow. Many banks offer favorable equipment loans or equipment lines of credit for construction contractor clients that allow the payment for additions to be spread out over a period of time.

Construction firms can face cashflow challenges for many reasons: the nature of the industry, inaccurate bidding, profit fade, or not understanding cash flow management principles. If you’d like an outside perspective on your cash flow system and tips for improving cash flow, call our knowledgeable professionals today!