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Cash Flow Management in Construction Industry: 3 Proven Strategies

cash flow management in construction industry - businessman with rising arrows

Cash flow is one of the biggest roadblocks facing construction companies of all sizes. Cash flow issues, such as under-billings, payroll, tax surprises, and supplier payments, can put a construction project into financial peril.

Below we explore three proven strategies that can help you improve cash flow management for your construction projects.

1. Get Retainage Released

In construction, the client often gets to keep 5 to 10% of the contract, ultimately released at the end of the project. A typical construction business operates at cost during the project lifecycle. This means that profit is earned at the release of retainage.

In scenarios when retention exceeds the net profit – such as a 10% retainage on a 5% net profit – it makes its way to the cash deficit column until the release of the retainage. The lack of access to this 10% is a massive financial drawback for extensive, large-scale construction projects.

You can address this dilemma by asking for partial release of retainage. For this, you need to add provisions in the contract that allow you to make these requests. These provisions need to be negotiated before the contract is signed. If you can’t make those provisions, sign off the unapproved change orders and bill them accordingly. Finish the outstanding punch list items, and submit your warranties and as-builts.

2. Speed Up the Accounts Receivable Process

On average, the payment timeframe in construction is 60 to 90 days. Make it a goal to cut down this number by 30 days by taking the following steps:

  1. Automate your invoices, and send them as soon as possible. Sending invoices ahead of time will help to maximize your cash flow.
  2. Offer payment incentives for early payment.
  3. Re-write payment terms to net 30.
  4. Review credit reports on potential new customers before finalizing any deals.
  5. Ensure you have a written Accounts Receivable Standard Operating Procedure (SOP), listing the necessary steps to effectively collect from non-paying accounts.

3. Boost Your Analysis and Forecasting Skills with Cash Flow Analysis

Don’t spend all of your time on income statements and balance sheets. An understanding of future cash flow is equally important.

Cash flow analysis and reports can offer valuable insights into where your money is.

In terms of estimations regarding account receivables and payables, consider having your cash flow analyzed and set up for reporting on a future facing 8 week basis with cash flow software, such as the one provided by Ionji™. Here’s how it works.

  1. Enter your project’s account payables, receivables, recurring expenses, and other relevant details.
  2. Ionji’s program runs algorithms to calculate and predict the amount of cash you will have on hand on a “go forward” basis, each week, for the next two months.

This can allow you to streamline key areas in cash flow management, providing a much-needed boost to your cash flow. Also, pay attention to the following ratios:

  • Working capital (current assets minus liabilities)
  • Days sales outstanding
  • Debt-to-equity (total liabilities divided by owner’s equity)

If left unchecked, negative cash flow can drive a business into the ground. Get in touch with us for cash flow management advice. Our highly-skilled experts can quickly enable you to know where your money is and make up lost ground. Contact us today at [email protected] or contact us directly at 800 714 3428.

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