How Cash Flow Impacts Performance in Construction
Posted February 26th, 2021
Cash flow is one of the most important factors of your construction company’s success. Good organizational cash flow management provides financial security for today and the stability to grow in the future. Cash flow also impacts performance. Specifically, the cash available for a project has a direct impact on your team’s ability to do its best work.
Start New Projects the Right Way
One of the biggest challenges commercial construction subcontractors face is the cost of starting new work. Thirty days before you submit your first pay app, your company will have to pay for labor, materials, supplies, equipment, bonding, insurance, and other costs. If you are paid on time, you still wouldn’t recoup any of those expenses for another thirty days. Knowing the issue with slow payments in construction, it is safe to assume you will wait even longer than that.
The upfront cost of new work requires you and your team to make some hard decisions about labor, materials, and other expenses. There is a better way — project cash flow management.
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Manage the cash sources and uses of each project just like you would your overall business. Estimate the project’s capital cycle as part of your bidding process to determine exactly how much cash you will need on hand to start a project with the optimal amount of workers, materials, and so on.
Estimating project cash flow can also help you make a better decision about HOW you will finance the start-up costs. If you are not using free capital (cash on hand not reserved for other expenses), you can research your best financial solution. Whether you choose a bank line of credit or a commercial loan product like ours, you can build the cost of financing into your bid.
And whatever you choose to finance new work, PLEASE read this before choosing a Merchant Cash Advance.
Avoid Delays with Good Cash Flow Management
The majority of delays in construction are due to cash flow. Can’t fund payroll? That’s a cash flow problem. Not enough funds to rent the Big Crane? Cash flow problem. Hurricane rips through town and destroys the site? Okay, that one is not a cash flow problem.
Forecasting your project’s weekly cash flow will help you spot the “danger zones” — the weeks cash is tight, your nervous about making payroll, and/or you spend the week chasing down people that owe you money. Spotting those danger zones in advance allows you to proactively manage them before they are a problem and gives you the chance to come up with solutions in a much more controlled and less urgent manner. There are lots of proactive solutions: explore your financing options, negotiate different terms with your suppliers, or discuss the schedule with your General Contractor.
That’s right — talk to your General Contractor. About money. Seriously. Listen, your GC wants you to do your best work so they have a successful project. You share a common goal. Bring an issue to them proactively, with an idea of how to solve it, and they are more likely to thank you than judge you. Bring them the same problem when it is in the middle of the job and it’s a different story.
And if they give you grief, send them our way.
Do More Work and Do it Better
Cash flow management allows you to make strategic decisions regarding your company. Where do you want to be in a year? Data will not only show you if you need to make changes in the company, such as reducing overhead, but also which types of jobs are most profitable for your company and should be on your target list for growth.
With good project cash flow management, you’ll also know you can take on those new projects, how much cash you’ll need to do them right, and how you will finance those expenses. And that may be the greatest benefit of cash flow management — the confidence that your company is secure, successful, and growing.
Ready to change the way your team performs? Answer 3 questions to start your application today!