Business Tips

Why managing cash flow is vital to your construction business

If there’s only one number a construction business owner should analyze on a regular basis, it’s operating cash flow. This financial figure indicates whether your business is healthy and earning sufficient money to operate, or if it’s in danger of collapsing.

“Cash flow problems are endemic to the construction industry,” says tax attorney Anthony Parent, co-founder of Parent & Parent. “Our company has helped hundreds of construction businesses turn around from disaster. Eighty percent of the time, the reason the business got into trouble in the first place was poor cash flow forecasting.”

Determining your company cash flow

In simple terms, cash flow is the money moving in and out of your business. The figure is determined by totaling your company’s incoming earnings and subtracting the cost of expenses, such as materials and payroll. Cash flow is adjusted for liabilities, receivables, and depreciation.

When you’ve got a significant cash flow discrepancy, it’s readily apparent you need to take action. Perhaps more insidious, however, are those “minor” cash flow problems. They’re like a slow leak; not a problem if monitored correctly, an extensive fissure when ignored.

Benefits of positive cash flow

Your construction company benefits from healthy cash flow in a number of ways.

  • Ability to pay bills and meet payroll with ease.
  • A financial situation that’s promising to potential lenders, creditors, and vendors.
  • Businesses with strong cash flow are considered good credit risks.
  • They possess financial agility to jump on business expansion opportunities as they appear, for instance, buying another construction company or a large piece of equipment at a reduced price.
  • A business that can weather the ups and downs of slow-paying customers.

How to manage Your construction company’s cash flow

Managing cash flow requires monitoring the money coming in and going out of your business to ensure you have sufficient operating cash. The easiest way to do this is to devise a cash flow statement/plan. Here’s a downloadable template for doing that from the Small Business Administration (SBA).

The easiest way to monitor cash flow this is to devise a cash flow statement/plan.

The simple act of filling out and totaling your cash flow statement will often alert you to any possible alarming trends. The statement makes it easier to keep on top of your accounts payables and receivables. If you apply for a loan, the lender will also want to check your cash flow statement.

Tips for increasing cash flow

One of the most obvious tactics to get cash flowing is to increase sales. Of course, this is easier said than done if you’re busy juggling finances because of sluggish cash flow. Here are some other tactics.

  • Promptly collect payments. While accounts receivable certainly isn’t a thankless job when you get paid, it’s no one’s favorite. Making collection calls as soon as bills become due is a necessity if you want to keep on top of cash flow.
  • Review payment methods. Are you consistently giving customers a month or more to pay you? This will quickly lead to cash flow problems. Consider changing to net due to 7 or 15. Also look into ways to collect payment at the time of service, for instance, with credit cards and point of sale (POS) loans.
  • Raise prices. Has it been a while since you’ve raised your rates? Take a look at the going rates. If you notice your competitors are at a higher rate, consider upping some prices or doing an across-the-board rate increase.
  • Get a loan/line of credit. Though it’s not the ideal solution, it might be necessary to get a business loan or line of credit. This can help get you through a rocky patch. If you already have a loan or line of credit and it’s maxed out, this is obviously not a viable solution.

Seek expert financial assistance

If your business is booming (hooray!) and you don’t have time to do a proper job at monitoring company cash flow, Parent suggests consulting an accountant.

“An accountant can set you up properly with a chart of accounts that makes sense for you,” he says. “You can also learn what each financial report indicates. This will help keep your cash flowing and your construction business humming.”