Essential Cash Flow Strategies for Construction Companies

Construction companies have long struggled with cash flow challenges, mainly due to the extended timeframes between securing projects, completing the work, and getting paid. To navigate this, it's essential for construction business owners and their leadership teams to understand and apply the basics of cash flow management. Read on to learn about some key principles that your construction business should consider.

Where does your revenue go when you get paid? Hopefully not into a shoebox under your desk! Construction companies need a banking strategy, whereby they consciously plan where to keep their money and in what type of accounts.

Think of your bank as a cash flow management partner. If you're dissatisfied with the services you're receiving, you obviously shouldn't hesitate to shop around. When contacting a prospective bank or working with your current rep, ask about specific ways the institution can help your construction company.

For example, you may be able to create a sweep account that automatically transfers excess funds into an "overnight" investment account. This way, at least some of your funds are earning interest instead of just sitting in checking or savings. Also ask about the latest bonuses and promotions being offered. Banking is a competitive industry these days and you may be able to benefit.

The construction industry has been slow to adopt electronic payments but such methods can provide businesses with additional flexibility. Depending on the timing of other cash flows, current needs, and short-term projections, payments made to vendors and subcontractors can either be extended until the last day of the payment terms if cash on hand is short, or paid early to bolster a relationship with a vendor or subcontractor. The near immediate transfer of the electronic funds allows companies to be more specific and intentional about when exactly – to the day – the money exits their business and is received by another.

Sound financial forecasting is another cash flow fundamental. It involves estimating cash needs by analyzing past billings, tracking payments on current projects, and projecting expected revenue from your backlog — all while keeping a close eye on direct and indirect costs, as well as overhead.

You can prepare forecasts on a job-by-job basis or for the company as a whole. Forecasting's major benefit is identifying surplus and deficient cash flow periods. Done properly and regularly, it should help you:

Precisely how to go about forecasting is beyond the scope of this particular article. Suffice to say that qualified professional advice and the right software can go a long way toward making it a reality.

Cash inflows for construction companies largely come from accounts receivable. Unfortunately, many contractors struggle with accounts receivable management because they don't maintain proper documentation or fail to make this documentation available to accounting or financial staff in a timely manner. Subsequently, cash flow suffers.

Choose regular, specific dates to generate accounts receivable reports and ensure those reports are automatically distributed to pertinent employees such as your fellow owners, CFO and project managers. Also, set up monthly meetings to discuss accounts receivable and strategize collections.

Strong financial reporting — including generating financial statements in accordance with Generally Accepted Accounting Principles (GAAP) — is another key. After all, along with the income statement and balance sheet, a statement of cash flows is an essential part of GAAP-compliant financial statements. It specifically describes all cash inflows and outflows, whether from operations, investments or financing activities. This is important, insightful data.

Of course, many businesses create a full set of financial statements only once a year. So, be sure to augment your statement of cash flows with more regular cash flow reports. Monthly is common.

Effective cash flow management is crucial for the success of any construction company. While this article covers some key basics, CSH is here to provide expert guidance and support. Connect with us today and learn how we can bring value to this vital aspect of your business.