In the construction industry many of us often experience cash flow problems – it’s part of the business. But careful planning can help identify small issues that can be dealt with before they become more problematic, and using simple cash management strategies can help us all manage and control cash flow better.
We’ve put together 8 strategies that we use to help improve our cash flow. Undoubtedly you will already have your own methods, but take a look, you might find some of these useful to you:
- Spread out the costs
Unless you receive a great discount, when purchasing materials you may be able to use financing to pay monthly with merchants. This might come with a little bit of interest, but it will spread out the required payments, leaving more cash in the business for operations and helping you to plan ahead.
- Spend time shopping around for the best service
All suppliers want business. If you let them know you’re looking around for the best service, e.g. urgent plant hire delivery, a supplier is likely to meet your requirements to win you over, especially if you’re not bluffing and willing to walk away. Reducing time spent waiting for deliveries saves money.
- Process change orders quickly
Change orders are common in construction, and they’re often because a project needs more money, resources or time than originally thought. Extreme weather can also be an influence. The project manager should process change orders straightaway, rather than waiting until the project is complete. The money should then be received much sooner having a positive impact on cash flow.
- Send automated invoices immediately
All of your invoices could be automated and sent out as soon as possible. Make sure your invoices are accurate to avoid delays through disputes. Maximise your cash flow potential by sending invoices out regularly and promptly.
- Accept electronic payments
Most construction companies already do this, but many still don’t! By accepting electronic payments, money will be received more quickly, increasing cash flow and allowing for more money to be used for daily operations, payables and growth.
- Train the project manager on cash flow management
In this industry, 85% of money comes from project work in progress, which means cash flow performance depends on the project manager’s cash flow management. As well as training, you could offer a small incentive based on cash flow performance – this is likely to be effective.
- Avoid over-billings and under-billings
Some project managers take pride in over-billing. As this means the invoice is higher than the job that is to be completed, it will increase the current cash flow, but the downside is that it will reduce cash flow when the project is completed. If under-billing, cash flow will take a hit all too soon. The best approach is to bill the client according to how much of the project has actually been completed.
- Set a goal for debtor days outstanding
Having a goal really increases the odds of success. In construction, the average number of days it takes to get paid is from 60 to 90. Consider setting a realistic goal to reduce that number to 50 days, to improve your cash flow. You can do this by sending immediate invoices, writing clear terms, offering payment incentives, checking credit reports prior to making any deals, and restructuring terms with non-payers.
Good cash flow management is essential for a construction business to survive and thrive.