Construction cash flow management is about more than paying bills. Construction cash flow management is about creating a system to organize all of the revenue that flows in and out of your business.
It’s not just about what you spend, but about how you apply your funds to the project at hand, and how you keep your assets and liabilities in balance during the boom and bust periods.
It’s also about making sure you have the funds to complete your current projects, while also being able to set aside revenue to grow your business.
Here are five key tips that you should follow if you want to improve your cash flow.
1. Plan Ahead
In Construction, cash flow management can be unpredictable. But that should never be an excuse for not planning ahead. This is where you should bring your experience to bear. Think about projects where you encountered cash flow issues, and ask yourself what you could have done to avoid those problems.
Plan things out in advance, ideally using accounting software, but even a simple spreadsheet can help you to get started. Track your invoices and expenses against payments. Be as specific as possible and track the amounts, due dates, and anticipated payment dates. Keep notes related to every expense and payment.
Once you’ve done that, try to look at the big picture and see where you may find yourself facing cash flow issues. Allow for the fact that not every project owner will pay on time. As you look at your cash flow, try to find ways to ensure that a late payment won’t cause your project to stall.
2. Don’t Pay Everyone at Once
Many contractors make one of two mistakes. Either they hold off on paying invoices until right before the due date, or they pay every invoice as soon as it arrives.
Instead, it’s important to stagger payments in a way that is both responsible and allows you to avoid running out of cash halfway through a project. Again, this is where planning comes into play. As you start logging invoices, record the due dates and see where your expenses fall in relation to your anticipated payments.
Also, keep your eyes open for early payment discounts. Many vendors will offer specific discounts for early payment. If you can take advantage of these, do it. Just make sure you have the funds available to cover the rest of the project.
3. Take Advantage of Financing
While it’s tempting to want to own that new tool or piece of equipment outright, be careful that you don’t spend so much money buying equipment that you leave yourself without the necessary cash flow to cover expenses over the course of the project.
While financing carries interest costs, spreading out the payments over time can be a great way to get the equipment you need without running out of funds. Just make sure that you can cover the costs with the funds you have available.
4. Communicate Cash Flow
As you develop your cash flow plan, make sure that you communicate it to your team members. Whether it’s a bookkeeper, back office staff or a site manager, make sure that everyone in your company is on the same page when it comes to cash flow issues.
Encourage team members to walk through their day and explain how they deal with invoices, payments, change orders, everything that has to do with managing project funds. You may find areas where a little communication can help keep critical invoices and information from falling through the cracks. Make sure that everyone has a process for managing funds that can be understood by everyone else.
5. Find a Professional
While some contractors still prefer to do their own books, many have realized the value in hiring a CPA, contract accountant or bookkeeping service. Having professionally organized accounts can greatly improve your cash flow situation and allows contractors to anticipate potential issues before they occur.
This also becomes important as you try to take on larger projects to build your business. The ability to demonstrate that your business has a healthy and balanced cash flow can make a difference when attempting to expand your credit and when applying for a surety bond.
This is why Ox Bonding offers its Project Accounting Services to contractors regardless of whether or not they have a bond need. Our team of experienced construction accountants tracks every invoice and payment to make sure that your project funds are managed to maintain optimal cash flow over the course of a project.
If contractors find that they are facing a cash flow shortfall, we can also provide Requisition Cash Advances to cover approved expenses such as materials, payroll, and equipment. That way they have the money to cover critical expenses and keep their projects moving.
Ready to take advantage of everything that the Contractor Credit Program has to offer? Enroll with Ox Bonding today, or call (877) 55-THE-OX.