Construction Companies & Cash Flow
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As a business owner, it’s important to carefully manage cash flow to ensure there is enough money on hand to fund ongoing operations. While every business needs to be concerned about cash flow, some industries, such as the construction industry, need to pay particular attention to this area because of the project nature of their business. It’s unfortunately common for construction companies to experience cash flow gaps because of inaccurate estimating by project managers or a delayed payment cycle that turns net 30 into 90 days or longer. The effect of either of these situations can lead to significant issues for companies. To help clients, prospects and others proactively manage cash flow, JLK Rosenberger has provided insights to help alleviate the cash flow gap.
- Flexible Scheduling – A common error many construction companies and contractors make is creating a schedule that is rigid and inflexible. While it’s true that time is money in the industry, it’s also important to remember the benefit of some flexibility. Any project manager can attest to the fact that delays are an inevitable part of the job. Such delays can include materials not arriving on time, lack of machinery and equipment availability or issues with labor. Whatever the specifics, it’s important to have some flexibility to make changes in real time to accommodate unforeseen issues. The last thing anyone wants is to make a payment for materials on one job site when the scheduled labor is tied up completely in a project that should have already been completed.
- Examine Payment Terms – Ensuring your company has effective payment terms can help prevent cash flow issues. Construction companies often elect not to use a front-loaded contract. While this may be helpful in terms of getting work, it can also create difficult situations for ownership. By requiring customers to provide an upfront deposit for work and services to be rendered, your company can foster healthy cash flow and position the proper resources to complete work without having to strain the budget while you wait for payment.
- Encourage the Right Behavior – Everyone needs a little encouragement and an incentive to do the right thing. In this case, consider encouraging customers to pay early by offering a small discount as an incentive for doing so. This could be as simple as 2% off if an invoice is paid in 10 days rather than 30 days. In our experience, these discount rates are suitable enough to encourage early payment from some customers. Keep in mind that once a payment is 120 days late, there is a high likelihood of non-payment. For this reason, it’s important to do whatever is practical to encourage quicker payment turnaround.
- Align the Project Management Approach – It’s estimated that as much as 85% of the cash a construction company has on hand is generated from projects in process. This is a compelling number and alludes to the need for a conservative management approach. Each project manager should be made aware of their project budget and understand how cost overruns or other expenses will not only impact the project’s profitability, but also the company’s profitability as a whole. Through an effective project management approach, where project managers work to stay within budget and proactively manage overruns when they appear, cash flow concerns will diminish.
- Vendor Estimates – If you’re like most companies, you have preferred vendor relationships. It makes sense to award your business to those companies that have met or exceeded expectations on previous projects. However, it’s generally a good idea to do comparison shopping to ensure you are getting the best rate for needed materials. New suppliers frequently enter the marketplace and are seeking opportunities to forge new relationships and win new business. This can sometimes result in a slightly cheaper price or an increased level of service. Take the time to check your current vendor’s price and be sure that they are at least in line with their competitors’ prices.
Taking proactive steps to optimize the cash flow process will ensure your company is well positioned for tomorrow and beyond. If you are experiencing cash flow issues, then it’s time to review your process to determine where improvements can be made. If you would like to learn more about how to address cash flow issues, JLK Rosenberger wants to help! For additional information, please call us at (949) 860-9890 or click here to contact us. We look forward to speaking with you.