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How to manage cash flow in the construction industry

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Maintaining steady cash flow in the construction industry is critical for a project to be successful.

You need fast access to key metrics and indicators before, during and after a job to forecast cash flow for construction projects and manage them profitably.

This article explains the components of construction project cash flow. It also address the issues with using spreadsheets to do cash flow forecasting for construction projects, and gives examples of how they can be resolved with accounting software.

Here’s what the article covers:

Cash flow in the construction industry

Construction cash flow problems

Components of construction project accounting

How to manage cash flow in construction

For construction firms, when dealing with cash flow, this involves managing incoming funds to procure the material, pay salaries, complete projects, and support other day-to-day operations.

The key is to ensure cash is flowing into the business fast enough to cover the construction supply chain and to keep costs low enough so cash isn’t tied up in one area of the business.

Funds need to be available in real time to cover expenditures as needed.

Cash flow can be an obstacle for the construction supply chain. If there isn’t enough positive cash flow, the lack of consistent funds could cause an issue for a project.

Common cash flow problems within construction are:

  • Taking on multiple projects and overshooting cash capacity
  • Failing to set up a payment schedule and/or an initial payment before starting work
  • Failing to fund an entire project due to late or non-payment
  • Mismanaging or not tracking change orders.

These issues occur more often when construction companies use outdated tools to manage cash flow.

Spreadsheets, for example, are limited in terms of construction cash flow analysis. They create the need for more manual processes to drill down to individual records to track things such as outstanding charge orders.

When using spreadsheets, they can be challenging to sift through when you’re searching for specific details.

And they don’t provide the accuracy checks needed to eliminate the challenges listed above.

Furthermore, spreadsheets don’t provide real-time information to support better decision making, address potential cash shortages or help you to seize opportunities.

To best manage cash flow for construction projects, it’s worth examining the financial implications through five lenses:

  • Planning
  • Tracking
  • Risk management
  • Budgeting
  • Resource management.

Below, we go into these in more detail…

Planning

Map out the path for the construction project:

  • Identify key milestones, dependencies, and constraints.
  • Set baselines for scope, budget and timeline
  • Assign tasks.

Tracking

Compare the estimates from the planning stage to the actuals regularly and accurately:

  • Actual expenses vs planned budget
  • Actual schedule vs planned timeline
  • Update stakeholders of status changes.

Risk management

Mitigate cost obstacles that occur during the construction project:

  • Quickly identify possible risks to the budget and potential impact
  • Identify possible solutions and a response plan
  • Continue to monitor and control the impact.

Budgeting

Track the overall financial performance for the project:

  • Manage project expenses and compare costs to budgets
  • Provide early detection and warning of potential overages
  • Forecast revenue and profit opportunities.

Resource management

Support staffing needs in compliance with labour laws and reporting requirements:

  • Track each person’s workload and availability and assign them to projects accordingly.
  • Forecast staffing needs to make proactive hiring decisions.

To run the business effectively and manage construction projects profitably, you need smart data to keep you ahead of the moving parts within each of the phases in the chart above.

Managing cash flow in construction using spreadsheets doesn’t provide the overview of financial and operations information required to make the best decisions about a project.

You need the right tools and systems in place to enact the best practices to manage cash flow in construction seamlessly and accurately.

Follow your numbers closely

You need to be able to quickly identify how each project on the books affects your overall budget.

Spreadsheets don’t give you the overview and detail that you need to do this easily. That type of expansive reporting is only available through accounting software built specifically to manage cash flow in the construction industry.

Accounting software enables you to create customisable dashboards, plus prebuilt reports to help you organise your data to keep you up-to-date on each project’s financial health.

Finance your fixed assets

It’s important to keep cash on hand wherever possible, including as you purchase fixed assets.

To keep cash from being tied up while simultaneously ensuring projects are equipped to continue as scheduled, it’s best practice to finance fixed assets and pay them off over time.

This leaves you with enough financial resources to cover your other obligations comfortably and build up your credit rating at the same time.

Explore your options for better payment terms

Make sure you are getting the best prices and payment terms possible from all your vendors. Your terms with your suppliers should ideally be equal to or longer than the terms you give your customers.

Talk to your suppliers about what you can do to get the best offer with your agreement, such as buying larger qualities or suggesting you may be interested in switching to a new vendor.

Invoice quickly and right away

Good invoicing – or setting up a workflow that keeps cash flowing from projects – requires close coordination between the project manager and the office manager.

Avoid payment delays by creating and monitoring a billing schedule closely.

Accounting software can automate this process for you and notify you with confirmation that invoices have been received.

You can also schedule a follow up a week after sending them to speed up any roadblocks.

Cloud accounting software can be used to set up contracts, invoice with the correct VAT, and record partial payments from any internet-connected device.

Process change orders quickly

Avoid starting work without written approval and monitor all open and pending change orders with a digital change order view tool.

This type of reporting provides single-screen monitoring and modification of prime contracts or any number of subcontracts and budget items.

Tracking change orders helps to avoid job cost surprises.

Final thoughts on managing cash flow for construction

In summary, the keys to managing cash flow for a construction project are:

  • Visibility of cash requirements in and out of the business
  • Smart reporting tools to identify risks and profit opportunities
  • Tools to easily track spending and expenditures
  • Transparency and control of the construction supply chain

This is all easily achieved by using accounting software that’s built with managing cash flow in the construction industry in mind.

Tackling the Construction Industry Scheme with Sage Accounting

Learn about the Construction Industry Scheme and your legal responsibilities, and find out about the new VAT reverse charge for construction.

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