The consistency of work in the commercial construction industry can be unpredictable. Sales professionals and estimators may secure bids on projects that keep the company busy for years, then the economy may slow, resulting in a lull in business. This constant change makes it important for construction managers to successfully manage cash flow in constantly evolving business environments.
Cash flow is the most essential component for any commercial construction project. Being able to properly manage cash flow on projects can be the difference between the success and failure of projects – and even your business.
For years, lack of control over cash flow has been a major contributing factor to the high rate of failure in the industry. According to the Statistic Brain Research Institute, only 47 percent of construction companies still are operating after four years in business.
Construction companies go out of business because they run out of money, not because they run out of work.
Cash flow is the money that is moving in and out of your business. The concept of positive cash flow is very simple: Cash coming in from clients should be more than cash going out for payments and expenses.
All contractors should take this subject seriously because no project is the same. Cash flow issues need to be controlled and addressed early in the process. If ignored, business owners can expect increased interest expenses, additional investment of owners’ capital, diminished credit ratings, inability to take advantage of new opportunities and, ultimately, failure of the business. Therefore, improving cash flow in commercial construction requires different strategies than other industries.
Consider these easy tips to improve cash flow and to help ensure your projects remain profitable from start to finish.
1. Research your client
. You only should work with clients that can process your paperwork, sign off on completed work and pay promptly. Research your potential client by getting a financial statement or, at the least, get references from contractors that have worked with the owner in the past. The goal is to make sure they have the financial capability, and mindset, to pay you on-time for completed work.
2. Negotiate contract terms
. Create and negotiate contracts so the payment terms and schedule work best with your company’s needs. Work with your subcontractors and vendors to schedule your payments to them after you receive payment for the work done or try to time payments within a few days after expected receipts from your clients. Negotiate a billing schedule that reflects the upfront costs of project mobilization, such as being paid for materials once they are delivered versus when they are installed and the project is finished.
3. Aggressively collect payments
. Try to get your accounts receivables down to 30 days or less. Stay organized so you have all necessary documents distributed to the proper people. That will help the payment process go more smoothly and will avoid delays. Be prompt when it comes to asking for payment on completed projects that have been inspected and approved.
4. Project future cash flow with a detailed budget
. Create a reasonable cash flow forecast for your project. Think about how long your project will last, how much you will spend on the project, how much you will pay vendors and at what point they will get paid. You want to have a good idea of how much cash you will have throughout the project.
Use cash flow management software to compare your forecast to your actual disbursements and receipts so you can make better decisions in the future. Proper planning will help prevent payroll and payment problems.
5. Establish a line of credit with a bank
. In emergency situations, having a line of credit allows you to be flexible as you wait for cash payments to be received. Keep in mind the goal is to help manage your cash flow, not go into more debt. This method should temporarily help you manage the day-to-day expenses of running your business.
Proper cash flow planning can help your business make intelligent decisions regarding budgeting, financing, capital expenditures, compensation and growth.
Managing positive cash flow is challenging, but it is critical to be aware of potential problems in order to achieve sustained success for your business.
Matt Bower is vice president of commercial banking for Arvest Bank in Springfield. He can be reached at email@example.com.