How to Manage and Protect Construction Cash Flow  | Handle

Blog

How to Manage and Protect Construction Cash Flow 

How to Manage and Protect Construction Cash Flow 

November 23, 2020

When you begin a construction project, you need a prudent plan. This means, among other things, having solid cash flow management. Forbes recommends looking at operations, finance, and investing for an accurate financial statement.

You can have negative and positive cash flows. Positive cash flow is when there are more inflows than outflows, while a negative cash flow is when there are more outflows than inflows. Different construction projects require financial plans in terms of estimation, invoicing, and payment.

Use the Right Planning Tools

Use tools like CostCertified to help you in the process of project planning. When you need home building, landscaping, deckbuilding, remodeling, house moving, or renovations done, you can get estimates at the click of a button. Construction firms need to have up-to-date cash flow data on a weekly, fortnightly, and monthly basis. Cash flow projections help to put the project on course and should be updated weekly.

Having data on the actual and projected cash flows can help a contractor make sound financial decisions. A construction project is always one wrong move away from stalling. A good cash flow statement is like a health diagnosis of the project.

Financial institutions require accurate and up-to-date cash flow data. Good financial management tools give you an edge by providing the right and precise information for every project.

Handle Your Supply Chain

Handling supplies is an effective way of reducing business expenses. Seek suppliers with the most comprehensive array of construction materials. This helps you get a discount and reduce transport costs associated with working with different vendors.

Negotiate better terms with the suppliers. You can work on the terms of payment. Look for options like delayed payments or discounts.

The more your vendor understands your needs and helps, the better your cash flow position. You can increase the payment terms to 15 days, 30 days, or even 45 days. Put all options on the table; you may get a favorable arrangement.

Never buy more materials and equipment than necessary. Some materials may be costly if stocked in excess. Use the cash flow projections to determine if there may be interruptions. Just-in-time purchases may not be useful in this regard.

Always check the financial positions of your vendors. If your leading vendors become bankrupt or go out of operation, the project will hit a snag. Have a contingency plan with multiple back-up vendors in case of such an occurrence.

Exercise Timely Billing and Collection

Economic conditions are always unpredictable. The best way to predict economic conditions is to prepare for them. Customers can go broke at any point due to financial hardships.

Avoid liability by treating every customer as a risk. Invoice your clients in advance and follow up on payments. To enable quicker payments, ensure that the documentation is always completed early for payment.

Stay ahead of billing-related work. Follow up on unpaid invoices and any due inflows. You can have a team dedicated to invoicing billing and collection of payments.

Incentivize early payments. You can provide discounts to customers who pay early. For example, give 2% discounts for payments made 15 days before the due date. Commercial businesses can take advantage of the offer to save costs. The rule is to avoid bad debts at all costs.

Automatic invoicing should be used and encouraged for online payment of services.

Use Milestone Payments and Deposits

Milestone payment is when a construction project’s cost is paid in stages rather than in a lump sum. Clients can pay 45% of the project before the project starts, 25% after delivering materials, and the remaining 30% after project completion.

Deposits are the upfront fee paid before a project begins, while down payments are amounts paid at the project’s start. Both the deposit and down payment form part of the total payment.

Using this option reduces financial strain during the project. Always use this option on the quotations for easy conversion with clients.

Use Preliminary Notices or Liens

A preliminary notice is a document sent by a contractor to the owner of a construction project or the main contractor and other parties involved in the payment. It is sent at the start of the project and highlights the type of work to be done and materials to be used.

Notices of intent to Lien, on the other hand, are warning documents. They are also filed by construction contractors, suppliers, and subcontractors. They state that you will file a mechanics lien against the property if the owners or clients do not make payments for work done on the property.

Consult your lawyers regarding liens and any terms and conditions to be followed when filing notices. In some places, filing these documents is mandated by law in the course of a project.

Cut Expenses and Spread Costs

Look at the cash flow and seal outflows that may not be necessary. Nevertheless, cutting costs doesn’t imply the breaching of contracts. Don’t cut out materials that are specific to the project or within the quotations. It may be a costly move.

You can trim excess labor and services you don’t need for a project. Contract workers are cheaper to maintain than permanent workers. Subcontract if you have to. Opt for economical ways of construction.

Never take in more inventory than required. Some materials like cement can spoil if stored for long, hence increasing costs. Be frugal in spending.

Unless purchasing goods is discounted, don’t use all the cash at once. Delay expenses whenever necessary. Plan for every penny and use it sparingly.

Leverage Relationships with Financial Institutions

Are you close to the edge? Don’t worry; banks are designed to help businesses rise out of the ashes under challenging times. You can get loans from them to complete the project.

Do you view loans to be expensive? Why not settle for a finance purchase order (FPO)? Here, a third party offers to pay for your costs to the supplier. You can choose between full and partial financing.

You have delivered services, but the cash is not available. You can sell invoices. Find a company that buys invoices and offer yours at a discount. If granted, you will have your money in no time.

Manage the Volume of Business and Resources

In case you get several clients at a go, don’t overstretch resources trying to complete all orders at a go. Schedule the projects at different periods to have a consistent flow of business at each turn. Keep a constant flow of business and use the minimum resources.

What idle resources do you have? Those resources can start earning money. Sell or lease any equipment that is not providing value at the moment or in the foreseeable future.

Conclusion

Coping with negative cash flow is not a walk in the park. It can push a firm to its demise. It is best to have proper financial planning and execution to help sort out the mess. Cash flow management can help you anticipate risk and avert financial disaster. Make use of the above cash flow practices to stay ahead of your finances and increase profitability.

This is a guest post from CostCertified.

 Further reading