One of the biggest factors that can take down a construction company is cash flow. Consequently, the topic of cash flow management and planning is crucial to success in this industry, even for companies that are turning a substantial profit.
What causes cash flow problems?
It is a lack of money, not a lack of work, that often causes a construction company to crumble, and a number of factors can cause cash flow problems. These include:
- Pre-payments to subcontractors or suppliers before payment on the project has been received
- The purchase of fixed assets
- Slow payments from clients
- Labor-intensive projects
- Investments in joint-venture projects
- Poor estimating
- Underbidding. In tough economic times, many small contractors take jobs that are not more than cost. A slight problem on site can lead to disaster.
- Poor invoicing and payment collection practices
- Poor site management and quality control; resulting in cost overruns, delays in schedules and costly re-work for which the contractor will not get paid
- Outside investments are made with business funds
- Unfavorable legal settlements
Supporting your construction business with cash flow management
As it sounds, cash flow management tracks the movement of cash through the production process and accounts receivable, back to expendable funds. The greater the predictability of this process, the greater leverage a company has with working capital.
Although there may be some degree of inaccuracy in the management of cash flow, contractors who do not attempt to create a cash flow plan do themselves a great disservice. It has been found that a few simple strategies can be integrated into normal operations to improve financial well-being. The Edmonton bookkeeping firm Truebooks offers expert assistance in this complex area of construction management.
- Cash flow management goes hand in hand with project planning. It is important to know when activities are to be performed in a project, and what resources will be necessary for each.
- Be mindful of how retention release provisions and payment terms will affect cash flow in each potential job.
- Plan the billing cycle of new jobs before commencing with any project.
- Do not borrow from one job to fund another.
- Pay suppliers and subcontractors with funds received from related projects.
Cash flow is a process over which you want as much control as possible. Companies with solid cash flow planning are those that will still be going strong years down the road.