If you run a construction company, you are already likely aware of the impact having good cash flow management can have on your company. With the UK on the cusp of a resurgence in 2024 with a predicted 12% growth in the industry, being able to last the distance and see through the recovery of the construction industry as the UK economy picks up can help you see your profits soar and give your business the boost it needs. Having a good cash flow is part of this.
But what exactly is cash flow, and why is cash king when it comes to your construction business? Cash flow is simply the measure of cash moving in and out of the company at any given time. Having a good cash flow means that you have more money coming in than liabilities, and a bad cash flow is the opposite. Pretty simple, right?
But what isn’t as simple as making sure you have good cash flow at all times and ensuring that you can balance the books? But this post is going to run through some suggestions to put to use within your construction company that can help you boost cash flow and stay the distance.
Project Future Cash Flow
Projecting your future cash flow isn’t easy; many companies won’t know the scope of the work they are likely to receive in any given 12-month period, but this doesn’t mean you shouldn’t try. Use your previous years’ work to help you analyse the type of jobs you are likely to get and the amount of work you can reasonably take on throughout the year.
By looking at the variables and the tools, labour and costs associated with running your business on a basic level; e.g. you will have to pay your employees if you have them continuously on the books, tasks, rental payments for equipment, membership fees for organisations you are a part of, etc. as a minimum, you can then begin to work out your budget and plan your cash flow appropriately so you always some money set aside to pay your minimum expenses before adding in potential costs from incoming jobs you take on.
Cash flow management software or construction accounting software can be helpful here to give you an overview of where you are now and how you prepare your finances to ensure all your expenses are accounted for.
Spread Your Costs
It’s not always a good idea to pay upfront in cash for your supplies, especially if you are struggling financially at some points during the year. For your more significant projects, it is a good idea to use a line of credit with suppliers, loans or credit cards to offset the purchase. While you will be liable for any interest incurred on these purchases and financing options, you won’t have to pay the total amount upfront, which means you have more cash running through the company to cover operating costs.
Shop Around
While it’s a nice idea to be loyal to a few suppliers to help you get what you need, it is also a good idea to shop around for the best prices and ensure that your supplier knows this is something you are actively doing. While you might not act on any other quotes, it can help you unlock the best prices, as each one will want your custom and will try to give you the best deal to make the sale. Always be willing to look around to ensure you are keeping your costs as slow as possible.
Process Change Orders Immediately
When your project changes for any reason and your costs change along with this, you need to act on these changes immediately, not at the end of the project. If materials suddenly change in price, the weather impacts your ability to network, and you need to pay for more labour than anticipated, the job runs into unexpected issues, and so on, you need to be billing for this sooner rather than later and being on the ball with getting the required money to cover costs can improve cash flow and avoid you being out of pocket until the work is completed.
Automate Invoices
If you are using accounting software, taking advantage of automated invoices for the project and billing as soon as completed, you can reduce waiting times between payments and get the money in your account faster. Even delaying by a few hours, especially if it falls late on a Friday when most places and indeed people shut down for the weekend, can push back your chances of being paid promptly. For even faster payments and for jobs that are coming in quotes with no changes, you can send the invoices ahead of time so the client has it ready to pay immediately as the work is completed or before if they are happy to pay before everything is finished.
Accept More Payments
One of the best ways to get cash moving through a business faster is to increase how many payment options you accept. Forcing people to pay cash, whilst preferable to you, might be inconvenient for them, meaning they need to go out of their way to find the money and collate the full amount, meaning it takes longer to get to you. Accepting electronic forms of payments, using card readers, accepting bank transfers, and even setting up payment schedules for regular monthly deposits can help you get the money where it needs to be in the business. Theis way, you can you use it how you need to without delay.
Get your Billing Correct
One of the biggest barriers to cash flow in construction is incorrect billing. Billing too much or too little will impact your cash flow and won’t give you the funds you need when you need it.
Use software to help you analyse the job at hand and preempt costs for labour, equipment, subcontractors, materials and more. The more accurate your quote, the easier it will be to bill correctly. And again, billing for any changes outside of your quote as soon as they become apparent can indeed help you to boost the cash as mentioned above. But one of the best ways to bill for your projects, especially the ones that take longer, is to bill as soon as each part has been completed.
Break your quote down into parts and bill when each one is done; this means you won’t have to wait until the very end to get your money, and you can ensure you have a good cash flow to make your ongoing payments, such as wages throughout the job and not have to pay out of pocket until the final bill is settled.
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