According to a survey from Kabbage, 28% of construction firms admitted that their cash flow struggles far outweighed finding new clients. As your construction business continues to grow, the frustration of managing a positive cash flow may continue. Cash flow remains an essential component of any business. Effectively managing this cash flow on construction projects throughout the year can be the difference between a successful or failing business.
Gaps in your business’s cash flow can affect your ability to:
- Attend to bills
- Order inventory
- Pay contractors and employees
Your cash flow balance can easily be stalled by inefficient business practices such as:
- Seasonal inconsistencies
- Delayed payments from clients
- Inventory surplus
- Overpaid vendors
- Persistent equipment maintenance issues
The construction industry is diverse; however, we’ve put together some practical tips that you can start implementing today for a better cash flow.
1. Create a sequence between project cash flow and company cash flow.
Components of projects can move fast, which is why it is important to align these with your usual company expenses. For instance, plan to pay all your foreseeable business quarterly expenses, total marketing costs, and any insurance premiums before the more significant expenses are due.
Your accountant can also assist you with tools to help you understand your finances more clearly so that you can make minute adjustments and cash flow can be levelled out when you are at the peak of making rapid payments. A helpful place to start is taking advantage of any upfront discounts when you make purchases or receive service from contractors. This also ensures that you have the funds for those unexpected overheads.
2. Divide your invoices
A cash flow cycle that is stretched out destroys your cash flow. Meaning, buying only the amounts of inventory you need to use, receiving payments upfront, hiring extra staff in busy seasons can dramatically improve your cash flow. Breaking up your invoices not only leaves you with more funds in your pocket but can also improve the customer’s experience with your business.
Some customers prefer to make payments in instalments than paying big lump sums because it also eases their own cash flow. This is a win-win situation for both you and your customers.
3. Accept automated payments
Incorporating an invoice software system that can create estimates, issue invoices and issue receipts after the client has made payment can help you receive payments faster.
Invoicing software (such as XERO) can be helpful because it simplifies everyday business tasks such as bank connections, paying bills, claiming expenses, and even calculating GST owing. Using automated payments through software such as Stripe (which integrates with Xero) can assist your customers in making prompt payments.
4. Hire responsible project managers
Without an accountable project manager to monitor the movement of money, your cash flow can quickly tighten. Responsible project managers should be equipped with the proper experience and training regarding cash management and allocations. Ensure that your project managers are very experienced in using your business software so that they are able to input correct data and monitor project actual expenditure with budgeted figures.
The key to managing business cash flow using the above strategies is planning. Parts of these tips must be executed in the pre-planning stage, while others must be worked on proactively throughout the course of a project or job.
If none of these tips is new to you, yet you still have some cash flow concerns, it’s time to call an accountant to discuss this further. An accountant that’s versed in the construction industry and its cash flow cycles will help you notice other potential avenues of revenue that your business is overlooking. We’d love to talk to you today about your cash flow concerns. As a dedicated construction industry expert, we work with businesses from 1 to 30 million in annual revenue, so our knowledge is exceptionally diverse within this space. Call us today or send us an email here.