Inadequate cash flow is one of the major reasons construction companies fail. It’s also the main worry keeping financial managers up at night. Cash flow can be doubly difficult to manage in construction because each project is typically unique with different contract and payment terms.
But there are ways you can better manage and maintain a strong cash flow. Here are a few basic tips:
Bill early, bill often
Bill as soon as possible to help set your customers’ payment expectations and demonstrate your professionalism. More frequent billing also results in smaller invoices, which makes it easier for your customers to make payments. You’ll also find out sooner if your customers are having financial problems so you can take appropriate measures on your end.
Pay early, pay often
Pay your bills weekly to take advantage of early pay discounts and to please your vendors and subcontractors with prompt payment. By paying early you also set yourself up to receive the best service from materials suppliers and subcontractors who want to do business with you.
Use progress (AIA) billing
When negotiating your contract, ask to use percentage of completion (progress or AIA) billing instead of fixed draws based on completed project stages. Progress billing enables you to send invoices on a regular basis that more closely matches your need for cash. And if the project is held up, you can still bill and get paid for the work completed to date.
Remind your customers to pay
Your cash flow depends on getting paid in a timely manner, so don’t be shy about asking for the money that’s due to you. Many contractors worry they’ll damage customer relations by asking too assertively to get paid. But a friendly reminder can be a help to both parties. An end-of-month statement summarizing outstanding amounts is a good way to gently remind your customers of their obligations.
Collect the money that is owed you
In addition to reminding your customers to pay, you need to develop regular (weekly) procedures for monitoring and collecting your accounts receivable. Begin investigating as soon as invoices become past due. Many customers, rather than telling you about a problem they’re having with your work, simply don’t pay—and the older an invoice gets, the harder it is to collect. Be certain to document all conversations with customers and project managers regarding past due invoices.
Accept electronic payments
By accepting more electronic payments—whether a debit/credit card, ACH payment, or a scanned written check—you can significantly reduce payment cycles. And, if you integrate a payment system with your accounting software, you can also eliminate the extra step of manual payment data entry.
Put your excess cash to work
Have excess cash at the end of the day? Many banks offer a “sweep account,” which automatically transfers amounts that exceed a certain level into a higher interest option. Talk to your banker to see what’s available.
Even today with more work flowing into many construction companies, a focus on your cash flow is critical. Contractors who know how to manage their cash flow are better positioned to weather the bad times, take advantage of booming work, and successfully stay in business for years to come.