If you work in the construction industry or closely with contractors, you’ve more than likely heard a contractor say at one point: “All of my jobs are making money. I don’t understand why I can’t make payroll.”
Maintaining profitability in an industry that’s struggled for years is definitely important; and having adequate cash flow in case of unforeseen circumstances ultimately separates the companies that succeed from the companies that fail. The reality is that more construction companies go out of business because of a lack of cash, rather than the inability to generate profits or obtain new work.
Cash flow management is challenging and rarely an exact science. Nonetheless, there are some simple action steps that can be taken to improve cash flow, boost cash reserves, and strengthen borrowing capacity.
By implementing critical best practices, you can better manage your company’s accounts receivable:
- Bill as early and as often as possible
- Negotiate billing and retention terms before a contract is signed
- Collect outstanding receivables often. Don’t wait until the receivables become past due before following up on the status, especially with new customers. Make a courtesy call to the customer between 25-30 days after the invoice was mailed in order ensure everything is in order and that a payment will be submitted by the due date
- Avoid being under–billed on projects. Always try to bill up to the job’s percentage of completion
- Change orders should be billed and collected as soon as possible after they are approved
Further, make sure you’re adequately handling your accounts payable by completing the following steps:
- Schedule payments by the due date to take advantage of possible discounts for early payment
- Mail checks as late as possible, but be sure to avoid late payment fees
- Match payments to subcontractors and suppliers with collections from related projects. This will help to avoid “job borrowing,” or borrowing cash received from one job to pay the bills of another job
Financing is a critical component to achieving a successful, profitable construction company:
- Accounts receivable factoring can increase your cash flow
- Investigate asset based loans where the equipment that you own serves as collateral, and the amount of the loan is determined by the value of the equipment
- Consider borrowing on the cash surrender value of an officer’s life insurance, which is usually at a lower interest rate. This will increase cash in the company without having a negative effect on your financial statements
- Consider leasing equipment instead of purchasing. In most cases, the payments will be lower than financing, plus an investment is not made in a piece of equipment that depreciates in value or is only needed for one specific job
Monitoring and Communication
Lastly, a successful business is built on communication:
- Communication with outside parties (i.e. lenders, bonding agents, vendors, etc.) is crucial. Keep them informed of any changes in your business and prepare a realistic business plan to present
- Utilize your accounting software to produce reports that will assist you in monitoring cash flow. Three helpful reports include: Cash Flow by Project, Analysis of Cash Status on Uncompleted Contracts, and Revenue Analysis by Job
- Communicate to everyone in the company, especially estimators and project managers, what the company’s breakeven point is. Also communicate that the profitability of a job is not as important as the cash flow of the job
It’s important to be aware that even profitable companies with a strong backlog can face challenging times if they don’t have a handle on cash flow. Recognizing potential problems and having the ability to minimize their impact on your business is critical for the growth and well–being of your company. The implementation of the strategies listed above can help enhance your cash flow, stimulate the growth of your business, and help you reach the next level of success. Please contact us for more information.