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.
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.
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:
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.
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:
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.
Let us show you how we can rejuvenate your business with a free and confidential business consultation. There is no obligation and no fee for the initial meeting.