Cash flow is one of the most important measurements in business. It is the amount of money and cash equivalents that move in and out of a business at any given time. Companies that have a positive cash flow have more money than liabilities.
This allows them to stay in the black and cover their bills every month. By contrast, those with negative cash flows don't have enough money coming in to fulfil their monthly obligations.
It isn't easy to make projections about your future cash flow.
In fact, it's a little more complicated in construction than in most industries because of the varying degree of jobs and the change orders on current projects.
One way to do this is by using cash flow management software. By taking advantage of these tools, construction companies can get a general idea about the income and expenses they expect to see in the future.
Proper planning in anticipation of these events will help prevent payroll and payment problems.
How to improve your cash flow...
1 - Perform a contract review
- Do you know the risk and liabilities?
- Do you get paid for materials on site?
- What costs are allowable?
- What the payment terms?
Make sure that you fully review and understand the Contract before you submit any bid or get into any Contract with either a client or a supplier.
2 - Know your client.
Before entering into a contract, carry out due diligence on potential clients. Consider using a credit agency to investigate the financial position of clients and make sure they are able to pay – ahead of doing business.
3 - Train the team on cashflow management
Communicate with your whole team that it’s in everyone’s interests to keep your business financially healthy.
Set a shared goal of reducing costs and maximising income, particularly among Quantity Surveyors, Project, and Site Managers who can influence financial decision-making.
Project Managers must be equipped with the proper experience and training with regards to cash management. It is essential for project managers to be proficient with whatever management software you may be using to ensure that the entire project runs smoothly
4 - Avoid retention
Retention locks away vital cash throughout the project and often way beyond pratical completion.Negotiating this out of your Contract will boost your monthly cashflow by 5-10%.
5 - Manage Your Receivables
Review your accounts receivables on a weekly basis and put an experienced person in charge of collections. Contractors with the best cash flow don't have to chase money that's three months past due, because they stay on top of payment delays by regularly monitoring receivables.
Put some thought into identifying the best person in your organization to manage your receivables and pursue collections. The right temperament for this task isn't meek and mild. It takes a firm and authoritative personality to successfully collect past due payments.
6 - Consider cashflow at tender stage
When estimating and tendering for work, teams often focus on individual elements of construction and how it combines to produce an overall programme of the works. But how many teams stop and think about how that programme impacts cashflow?
Producing a cashflow forecast based on your programme will allow you to price accordingly and may also make you re-evaluate the order you complete certain key activities.
7 - Be clear and consistent with your valuation
Submit monthly progress valuations before the due date. These must be in the correct format and include the required supporting documentation. Check the client has received the claim.
8 - Update your programme
If the progress valuation is made according to the percentage of work completed as recorded on the progress schedule, then ensure that the schedule has been updated correctly. Why get paid less than you are entitled?
9 - Proactively agree change
Submit and agree on variation claims or instructions as soon as possible. Clients don’t pay variation claims until they have been agreed upon. That argument over the last few hundred pounds in your variation claim may be delaying you receiving payment for it.
10 - Embrace Automation
There’s a lot to be said about the impact automation can have on processes like accounts payable, procurement, and progress reporting.
Store records in the cloud, we talk about this all the time, but it’s worth repeating: cloud storage is essential for visibility, across the board. The benefits include improved collaboration and real-time insights into spending patterns.
Think about it this way: bringing your purchasing process into the cloud means you can check incoming orders against pending ones, cutting back on duplicates that hurt your bottom line.
Cloud-based record-keeping means that construction companies can make better predictions about how much to charge clients because all the data is right there–including subcontractor pricing, past estimates, and records of change orders. Armed with this information, guesswork becomes a thing of the past.
In summary, taking a few simple steps can improve cash flow.
Most importantly before pricing a project check the credentials of the client. Do they have the money to pay you?
Do they have a reputation for paying contractors late?
Do they have a habit of engaging contractors in legal disputes over variation claims? If there are any doubts that you’ll be paid then don’t price the project. No contractor is a bank that can finance their clients.
Of course, avoid the temptation to pay subcontractors and suppliers late to improve your construction project cash flow. This is unfair to them and will cost you in other ways.
What do you do to improve cash flow on your projects?