Maintaining a solid cash flow is essential to completing a construction project. Consistently available funds provide the means for covering project expenses – without money, a project is doomed. Because of the nature of construction work and the contracts that cover them, cash flow is a consistent problem for many contractors and can lead to stalled projects and ruined business relationships.
Here we’ll talk about how cash flow differs from profitability, and discuss some methods contractors can use to maintain healthy cash flow for construction businesses.
The difference between profitability and cash flow
One of the challenges contractors face in maintaining adequate cash flow is that they confuse cash flow with profitability. Profitability is a measure of whether a project or a business is making money – if the client pays you more than your total costs on a project by its completion. Profitability is a good measure of whether your bids are high enough to net you a solid margin you can use to build your business.
However, profitability isn’t necessarily enough to keep your business viable. To keep the doors open and the lights on, your business also has to have a healthy cash flow.
In contrast to profitability, construction project cash flow measures the net amount of money flowing into and out of a business at any given time. Contractors paying for supplies, labor, equipment rental fees, and permit costs need to have enough cash coming into the business to cover those costs. If they don’t, they have a negative cash flow.
Cash flow management assesses expenses and income to ensure adequate availability of funds throughout the project life cycle and throughout each year. Cash flow management strategies are critical for any business. They can be especially important for contracting companies, who must maintain ongoing business operations but only get paid at specific project milestones. Accurate predictions of cash flow over the project’s life ensure adequate funding is in place to complete the project.
What follows are some strategies contractors can use to predict, plan, carry out, and analyze cash flow throughout their projects.
How to manage your construction project cash flow
Cash flow management ensures funds are available to pay your expenses. There are plenty of methods of doing this. Some contractors attempt to spread out expenses to preserve bank account balances, while others focus on backup funding to bridge any emerging gaps. Here are some ways to ensure your business has the cash flow it needs to maintain operations throughout a project life cycle.
The first step in ensuring good cash flow is to make sure you’ll get paid enough to cover project costs with a profit margin big enough to support business growth – you’ll have to make sure the project will be profitable, in other words.
Accurate bidding involves thorough knowledge of the project at hand and a lot of data about previous performance on similar work. Create a system for tracking project metrics that you can use to understand actual costs and timelines on future bids.
Create contracts that work for you
One of the factors that makes cash flow tricky in construction is that while there are near-consistent expenses, revenue comes in only at specific, contract-specified intervals.
- Create a contract that will help you maintain a healthy cash flow.
- Make sure you get an up-front deposit before any work begins
- Write a paid-when-paid clause into the contract so that you’re not liable for payment to subcontractors until you receive payment from an owner
Create and maintain a cash flow document
A cash flow statement maps out the cash that will be available throughout a project. It tracks accounts payable and accounts receivables so you can get a clear picture of the flow of money into and out of the business.
The cash flow statement isn’t a static document. It should be monitored and changed as needed, including when change orders occur. A detailed record will predict when funds might be tight so you can be strategic with bill payments, materials procurement, or other more flexible expenses until the business receives compensation.
Develop a cash flow contingency plan
Despite the best planning and intentions, sometimes things don’t go to plan. Delays of any kind can seriously hamper cash flow, and they frequently happen on construction projects. Have a plan B – a line of credit or an asset you can liquidate - to help you maintain business operations until you receive another payment.
Tighten your accounts receivable process
Finally, healthy cash flow necessitates regular influxes of revenue, which means you must invoice! Your customers aren’t likely to pay until you produce a bill. Send accurate invoices as quickly as possible and remove as many barriers to payment as possible. With MazumaGo, you can create invoices quickly and easily, track payments for more revenue predictability, and include a payment link directly on your electronic invoice.
MazumaGo also tightens up the payment issuing timeline. Once your client receives an invoice, MazumaGo can facilitate instant payment, unlike ACH payments which can take multiple days’ processing time. Checks can even take weeks by the time your clients’ AP team has them printed, signed, and sent via snail mail to your business, and even then they may be subject to holds by your financial institution.
All the time you’re waiting for payment to finalize is time you can’t use those funds to run your business. Do your part to shorten the timeline between the work you do and the cash in your wallet to improve the cash flow through your business.
Pinning down your construction cash flow management
Profit alone isn’t enough to keep your business running. You need cash flow to make sure you can pay consistently emerging costs. Managing your construction business’ cash flow requires consistent tracking and monitoring efforts, but it doesn’t have to be that difficult. Create a cash flow management plan, track money in and out, and make sure your receivables are on point to keep revenue coming in. Check out how MazumaGo can make it easier for you to track cash flow and make it easier for clients to pay you – get started today!