For example, are you overbilled–meaning you’ve billed for more than the work you’ve actually completed? Conversely, you’re underbilled if you’ve completed work that you haven’t billed yet. And with the right know-how and strategies, contractors can turn managing their cash flow from overwhelming to profitable. Cash flow is the difference between cash coming into your business and money going out. It’s the fuel that keeps the engine running, so you have to keep it steady or risk not covering daily operating costs.

If you have a strong financial plan in place and enough capital to cover the costs of a new project, you could expand your revenue streams even as other projects aren’t quite finished up. Even though cash flow is critical in this industry, construction companies face more cash flow challenges than almost any other trade. In most instances, cash flow problems can point back to four early warning signs. In the construction industry, project management timelines are often made up of many layers of dependent work. Drywall installation can’t happen before electrical lines are run, for example.

How to Create an Employee Handbook for Your Construction Company

But remember, cash flow isn’t the only factor of a construction company’s financial health. Also factor in profitability, liquidity, debt levels and overall stability. If clients are taking longer than expected to make payments, it affects cash flow. While this may seem like a problem that’s out of your hands, late payments often can be traced back to issues in the construction billing process.

If you have the means, hire a CPA that can help you avoid common mistakes and guide your business to a better financial standing. Whether hiring internally or through a third party, try to find an accountant that is a good fit for your specific business that understands your trade and industry. This starts with looking inward toward your current financial standing.

Consider invoice factoring.

This financial buffer provides peace of mind and ensures you can serve clients effectively. Be Strategic About Your Suppliers The COVID-19 pandemic rocked the construction industry, driving up the cost of materials and disrupting supply chains around the world. This makes it essential to pay close attention to your suppliers when looking to manage your cash flow. Forecasting involves predicting future income and expenses based on past trends, market conditions, industry standards, etc.

• Make project management software your one place to pay and get paid with Buildertrend Payments.
• Taking the time to evaluate the potential pitfalls that could be hurting your business can help to keep your contractor business healthy.
• It makes it easier to review and manage cash reserves on an ongoing basis.
• You may still have a positive net profit and still struggle financially if your cash flow is negative.
• To create a cash flow statement, start by categorizing all your expenses into operating, investing, and financing activities.

By offering them something they want, your construction company can save money on materials. Although you can still write your invoices manually, it’s better to use software to simplify your work. Invoices sent ahead of schedule will help maximise your cash flow potential. It would be best if you did not do this in any particular circumstances. Underestimating material costs, labour hours, or unforeseen project changes can leave you scrambling to cover unexpected expenses.

How do you calculate cash flow in construction?

If you’re using spreadsheets and paperwork to track payment schedules and work schedules, you’re probably slowing down your own billing cycle and affecting cash reserves. Setting a routine for monitoring your cash flow against forecasts is crucial to help maintain positive cash flow. This disciplined approach allows for maintaining financial stability and fostering an environment for informed strategic planning. The cost of capital, whether construction cash flow it’s in the form of interest on loans or reduced profit margins from early payment discounts, should be carefully weighed. Maintaining a healthy cash flow requires ensuring invoices are approved upstream (by clients) before approving downstream invoices (for example, to subcontractors and suppliers). Incorporating a “pay-when-paid” clause — which is common in Guaranteed Maximum Price (GMP) contracts — is an effective strategy.

• Cash flow can create problems when a construction company doesn’t have enough to cover costs when bills are due.
• It’ll also allow you to pay your team, complete jobs, and provide you with the peace of mind and confidence that you’ll be able to keep your business afloat.
• You can also work with your financial team or accountant to develop a more accurate estimate.
• Change orders are documents that request changes regarding the initial contract set between parties.
• Procurement professionals and construction managers must understand the importance of cash flow in their projects.
• Whether hiring internally or through a third party, try to find an accountant that is a good fit for your specific business that understands your trade and industry.
• But without care, even highly profitable businesses can go to the wall because of cash flow issues.

Each of these financial instruments has its own advantages and drawbacks, and their selection should align with the overall financial strategy of the project. Negotiating payment terms with your vendors or partners means discussing better ways to pay with them. You can improve liquidity and reduce financial strain by negotiating favorable payment terms and optimizing cash flow cycles.