Most construction companies are struggling to get paid on time. According to a recent survey of construction company owners, 1 in 5 respondents say that cash flow is a problem they have to face at a constant basis. Only 13% reported that they do not experience any cash flow problem at all.
Cash flow problems not only affect your company’s liquidity, but it also hampers your growth and affects your future goals. Negative cash flow leads to operational issues, including late payments on company bills and delays in employee compensation. Bigger construction companies may manage to stay afloat amidst these cash flow woes. Small contractors may not be as lucky. Worst case, these cash flow problems can be fatal.
Before bad becomes worst, you need to know the pitfalls that affect your cash flow. Here are some of the most common mistakes in construction cash flow management.
Failure to Prepare for Contingencies
Financial management in construction companies can be a daunting task for business owners. Due to the nature of the industry, unexpected events such as inclement weather, market conditions, accidents, and subcontractor unavailability can cause cash flow fluctuations.
You may be closing a lot of sales and enjoying exponential growth now but it doesn’t mean you won’t experience operational problems later. Construction suppliers may increase prices or you may have unforeseen expenses that need to be paid immediately.
Always keep a cash reserve for when the unexpected happens. It will happen, guaranteed, and you need to be prepared for it. When something goes wrong, you have the cash to maintain your business operations. The best time to build your cash reserve is yesterday. The second best time is today.
No Cash Flow Strategy
Construction business owners who do not have systems in place to manage cash flow shortages will experience cash flow crises. Keeping a cash reserve is only a temporary solution to a cash flow problem. Without finding the root causes of your cash flow issues, you’ll only deplete cash reserves and that could lead your business to its untimely demise.
A cash flow strategy is important to ensure smooth business operations. It defines the steps and processes you put in place for the purpose of managing the movement of cash in your business. Your cash flow strategy must involve close inspection of business processes, monitoring expenses, and analyzing debt collections, as well as revenue sources.
Maintaining a healthy gross profit margin is key to an effective cash flow strategy. Studying job costing reports is one way to manage your margins. A job costing report allows you to identify if you are pricing your services right by outlining the true cost of your service and supply delivery. There are business owners who haven’t taken a serious look at their costing and pricing, unwittingly running their company with no prospect of profitability.
A cash flow analysis also helps with planning your inventory, managing the timing of borrowing and investments, and adjusting your business plan to maximize profit.
Being Passive on Collecting Payments
The faster the money flows in, the quicker you can solve a cash flow management problem.
A lot of the cash flow problems in the construction industry stems from a lengthy period between billing the client and collecting payment. Let’s face it. Clients can be notorious for stretching pay periods. If you are passive in sending payment reminders on the due date, they are likely to delay your payment.
One way to make collecting payments easier is by having a regular invoice schedule. Include the billing schedule in your contract so your client knows when to expect it. Follow the schedule closely and don’t slack on sending invoices.
Before your receivables cause a serious cash flow problem, take a close look at your clients’ accounts that are past due. Start making calls and follow-up emails to these clients, especially the accounts that are at risk of becoming delinquent. Imposing penalties for late payment may also improve your collection rate.
To improve your cash flow, it’s crucial to be more vigilant in managing accounts receivable and proactive in collecting payments. In times of cash flow shortages, every dollar counts.
Don’t allow your business to fall prey to these cash flow management mistakes. Awareness is always the first step to effective cash flow management. It may not be the most exciting part of your business, but it is vital in keeping your business alive.
Aki Merced is the Content Manager at Handle.com, where they build software that helps construction businesses get paid faster by automating the collection process of unpaid construction invoices.
5 thoughts on “3 Cash Flow Management Mistakes Construction Companies Make”
I find that fine-tuning my invoicing and payroll schedules has been a huge help for my small business. Some of these tips I use regularly, but because I work with a number of independent contractors, I have to rely on them to submit timely invoices. Perhaps a form email reminder would save me time.
Thanks for covering billing management. It’s a challenge!
Hi Adrienne! The timing of payables and receivables really does make a huge difference in cash flow. Thanks for sharing that tip and thanks for reading.
Oh boy, these bring back some very bad memories. Still make mistakes like this when I let my guard down, always gotta pay attention!
Hi George. Thanks for reading. You’re right! If you’re not vigilant, any of these mistakes can cost you big time!
I think these are all important points you brought up. At the end of the day, businesses need cash flow and some construction projects have longer cycles than most. I think this can be a double edged sword as far as big dogs controlling the market but being capped due to cash flow. This allows smaller companies to enter the market.