Construction Management Solutions to Streamline Your Cash Flow
Posted November 3rd, 2020
Cash flow management is a critical component in the success of any business, and it is especially critical in industries like construction where a lot of cash or credit is needed, start-up costs are high, profit margins are thin, and getting paid can be a real hassle. The complex cash flow ecosystems that construction and manufacturing companies survive in make effective cash flow management absolutely critical. The good news is that there are technology solutions that can streamline your cash flow management.
Why Cash Flow Management is So Complex in Construction
Making money in construction is contingent on many factors, some of them completely beyond your control. Your work is dependent upon the performance of other trades. Project schedules shift due to weather, design changes, and resource shortages (which are typically a cash flow problem in reality).
The complex payment hierarchy means you pay out large amounts upfront and are paid slowly and over time. This makes managing cash in the business more difficult. Sure, there is money in the bank account, but what money is that for? Is that payroll for this week, but for what job? Can I use some of that money to buy materials for the new job starting or is that the money I need to pay for the materials I already used for this project?
As you know, these are real questions and the real answers are not easy to determine if you are operating only out of your checking account and don’t have any reports or cash reports to make decisions off of! You can make this easier and it is easier to do when you have the right cash flow reports and cash management tools. With these tools you will be able to:
- Know what bills to pay with each chunk of cash you have come into the business
- What to do with the cash that is in the business right now
- What money needs to be allocated to the new job and what money needs to stay on the current job
- Know if it is the right time to buy the next piece of equipment
- Know when you can take some money out of the business for an owner distribution
Complex isn’t impossible, though. There are a number of tools and technology solutions that can help streamline and improve your cash flow management. Let’s start with something really simple: an Excel spreadsheet.
Plan Project Cash Flow in Phases
Many contractors determine project costs as a lump sum, but that is not how those costs are incurred. Similarly, contractors will estimate profit as a lump sum, but that is not how you make your money. To accurately plan the cash flow on a project, you need to not only see how much money you will be spending and earning, but WHEN those amounts become relevant in relation to the project.
Our Cash Flow Tracker tool was created to do exactly that.
When you can see your project cash flow broken down on a weekly basis, you can make smarter, more strategic decisions regarding labor, supplies, equipment, and financing.
Bonus Tip: If you want more integration between field and office, use a construction management tool or save your Excel worksheet on a cloud-based document sharing platform like Google Drive or Microsoft Teams.
Let Data Inform Your Bids and Estimates
Doing a bid the right way takes time. A bid is more than just a number and specs — it is the story of how a job should be done, how much it will cost, and why you are the best contractor for the job. Show General Contractors your experience and expertise by building estimates from real historical data, easily pulled from your construction management software.
Power-up your chance of winning by showing REAL historical numbers to back up your estimates.
Integrate Your Teams with Construction Management Software
Construction is an industry of constant change. Changes happen in the office and on the site. Changes to the construction schedule that aren’t properly communicated can result in equipment rentals or material orders happening out of sync with the project’s actual schedule. Each of these cost the business hard-earned money.
Bottom line: Your entire team needs to know what changed, when it changed, and how it impacts the rest of the project — and the rest of your other projects!
Construction Management Software tears down the communication silos between departments. It creates a shared source of truth for every project, increasing transparency and efficiency, and cutting down on email chains, phone calls, and trips to the field.
Automate Your Accounts Payable
You will always need a controller, bookkeeper, and/or CPA. However, when it comes to Accounts Payable, manual entry is inefficient, often relies on the knowledge of a single person, and results in errors and manual rework to correct.
Lack of communication transparency between field and office teams means reporting and invoicing is always reactive rather than proactive. Likewise the field is often at least a day behind on new information affecting the project’s cash flow. An automated, cloud-based AP system that is integrated with your construction management system means everyone has the information they need when they need it. If something changes in on-site, the Project Manager and the office team will know about it on the same day. Similarly, if something changes on the project’s cash flow or finances, your office staff and Project Manager know about it at the same time. This increases communication and proactive problem-solving.
Why Cash Flow Management is So Important
Cash is the make-or-break when it comes to construction. You need to be able to pay for supplies, materials, equipment, and labor to keep jobs moving, and cover your overhead costs to keep the lights on, AND you need enough money to invest in your company’s growth. And if you’re lucky, enough free cash flow left over to make a profit for yourself.
Long-term cash flow shortages can ruin a business. If you can’t complete the work and have to leave a job, your reputation suffers. If you can’t pay suppliers on-time, you are less likely to get better terms which inhibits your potential to perform. If you are feeling a cash flow crunch, you are more likely to fall victim to shady funding solutions like merchant cash advances.
Here’s the upside: Effective cash flow management ensures you have the funds to do the amazing work you’ve built your business on. Access to cash is the only way to grow — you need to be able to jump on an opportunity when it happens. The free cash flow created from performing your work enables you to grow your business, build up your balance sheet, and it empowers you to fulfill your company’s broader purpose. Charity, education, whatever it is — you need cash to do it.
When you can see where your cash flow pain points are, you can proactively work to resolve them. When you can accurately estimate, track, and forecast your cash flow, you can take the reins of your future and start really planning for growth.
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