3 Simple Tips for Improving Construction Cash Flow
Posted August 9th, 2021
The state of construction cash flow in 2021 is well below the level of comfort for most contractors; the industry is still recovering from the damaging effects of the pandemic. Our good friends at Levelset recently released the 2021 Construction Cash Flow & Payment Report, a detailed report on the state of cash flow and payments in the industry.
We wish we’d been surprised by the takeaways, but we talk to contractors every day about cash flow. We know how hard it is out there right now.
Construction Cash Flow 2021 Takeaways
· Out of the 764 respondents, 9% said that they get paid on time
· 97% experienced stress related to late payments and cash flow
· 71% of companies filed for a lien
According to the report, 33% of contractors finance cash flow gaps. Financing growth is actually a smart business move and financing a short-term project cash flow gap can actually improve outcomes on the project, but regular gaps in your operations cash flow can spell serious trouble. There is a BIG difference between financing cash flow gaps in your project versus organizational cash flow shortages. If there are continual cash flow gaps in the business that could be a sign of much greater problems.
The slow payment cycle and payment delays typical to construction contribute to cash flow issues for many contractors. Stress over cash flow impacts your company’s ability to grow AND your team’s ability to perform on the job. The good news is there are simple steps you can take to improve your company’s cash flow.
Hire an accountant.
An accountant is a partner to your business – they are NOT just someone that does your taxes. With an accountant on your team, you will be able to forecast gaps that could hurt your company and help you solve for them in advance. Knowing how to calculate and control your company’s cash flow will positively influence your businesses’ profit and revenue.
Don’t want to spend money on an accountant? Most companies find that a good CPA will pay for themselves just in the tax savings they uncover. Also, consider how much time you spend each week keeping your accounts in order. Finally, what would you be willing to pay to have peace of mind that your company is cash flow positive and growing on a solid foundation of working capital?
Communicate early and often.
Communication is instrumental in building trust. Good communication is a predecessor for good relationships. If you have questions during the bidding process or after, make sure to ask the general contractor to clarify. Doing this, as well as sending preliminary notices, can lead to punctual payments.
Some contractors are hesitant to send preliminary notices, but part of good communication is setting expectations early and clearly. Sending pre-project notices, documenting everything (even if it is just by email), and insisting on change orders all work to keep your expectations clear and present in the GC’s mind.
If a payment is delayed, reach out and ask why. Don’t assume. Keep communications positive and solution-oriented. Remember, you are on the same team working to get the project finished, preferably with a profit for both of you. Solve problems for your GC or, even better, ask them how you can help them solve the problems they are having with their customer.
Refer to How to Get Paid and What to Do When You Don’t for more information on effective communication with contractors.
Plan cash flow by project.
Estimating and tracking cash flows for each of your projects can increase your businesses fluidity immensely. By managing cash flows, you know exactly how much money you’ll need for payroll, materials, insurance and other expenses. You’ll also know when you’ll get paid (provided you get paid on time). This allows you to see the cash flow gaps on a project before they happen. It also allows a business owner the ability to mitigate risk and organize investments. Project cash flow management doesn’t only impact the specific job, it also affects the business as a whole. Healthy cash flows mean that a company is growing and expanding. Cash management and stability can be determined by tracking your cash flows.
Cash flow in construction is tough, but not impossible and not beyond your ability to control. The pandemic impacted every industry, but construction survived and has recovered swiftly — in no small part due to the mental toughness of its people, people like YOU.
We cannot go back and change the damage done by the pandemic; we must instead focus on the future. Good cash flow management is one of the biggest factors in ensuring your company’s future is bright and filled with opportunity.
This article was written by our Summer Intern, Matthew Smith. Matthew attends Auburn University (Go Tigers!) and is studying finance and marketing. Thank you for all your hard work, Matt and good luck on the new school year!