Top Methods to Improve Cash Flow Management in Construction

Cash flow is pivotal to any construction business. It refers to the money that moves in and out of a company over a set period. Managing cash flow is crucial to ensuring your business has got enough money available at any given time to cover necessary expenses, such as equipment, raw materials, and labour.

With every construction project working within fixed deadlines and budget, any problems with a company’s cash flow can jeopardise a project’s viability. New schedules must be created, resources reallocated, and margins re-calculated.

With the right methods to improve cash flow management in construction, you can safeguard your business’s profitability, avoiding potentially disastrous delays and costly overruns.

In this article:

• What is Construction Cash Flow Management?
• Why Does Cash Flow in Construction Matter
• How to Improve Cash Flow Management in Construction

What is Construction Cash Flow Management?

Construction cash flow is the money that moves in and out of your construction business between two dates. For example, it’s the revenue inflows and expense outflows for a given time period, E.g., a week, month, or year.

Most construction firms monitor and report cash flow for each project they work on. It helps determine profitability and margins for the duration of the project.

Balancing income streams and expenses is crucial to the viability of any project. Over the life of any project, your income should always exceed your expenses.

Your potential income streams include:

• Project payments
• Down payments
• Change orders
• Subcontractor markup
• Equipment rental fees
• Service contracts
• Insurance claims
• Government grants
• Late payment penalties
• Material sales

Your potential expenses include:

• Labour costs
• Materials
• Equipment purchases/rentals
• Subcontractor fees
• Permits and licenses
• Insurance premiums
• Utilities and office costs
• Vehicle and fuel expenses
• Marketing and advertising
• Loan repayments and interest

Why Does Cash Flow in Construction Matter

If you calculate cash flow incorrectly, you could find yourself in a position where you haven’t got enough money to cover expenses. Positive cash flow involves more money coming into the business. Negative cash flow is the reverse.

For example, seasonal trends may mean that you drive additional revenue during the summer months and less during the colder winter months. In this case, you may save enough money during a period of positive cash flow (summer) to cover expenses during a period of negative cash flow (winter). If you don’t have enough money, you will have to extend a line of credit or delay the project. That increases your final payment due to interest or damages your company’s reputation.

How to Improve Cash Flow Management in Construction

Cash Flow Forecasting

In the planning phase of any construction contract you will set out your agreed budget. Using the agreed timeline and financial forecast, you can determine what you need to pay and when, including materials, labour, and more. You can also determine when your income streams should arrive, including client payments and other fees.

Try to leave a substantial gap between your inflow and outflow. This provides some flexibility if there are issues with receiving your payments.

Comprehensive cash flow forecasting lets you highlight potential issues ahead of time. For example, if you’re predicted to spend more money at a certain time than you’re taking in, you can budget to increase the company’s savings to cover the shortfall.

Use a Reliable Accounting Platform

Make project management simpler with a construction accounting platform, a software that evaluates cash flow management for construction projects – all in one place. This helpful tool can forecast expenditure, factor in fluctuating materials prices, and analyse your existing financial situation to issue early warning signs. It’s the best way to tackle cash flow issues and perform corrective actions.

Plus, accounting platforms let you track every invoice – ensuring it’s set, received, and paid within the right timeframe. Given that payment delays are a major factor affecting construction cash flow, it’s crucial to have a platform that prevents invoices from slipping through the net.

Set Payment Schedules

The construction industry is notorious for long payment cycles. It’s not unusual for a company to pay for materials upfront only to be paid 90 days or more later. The solution is to break down the large lump sum payments into smaller invoices that clients pay on a regular basis. This prevents clients from falling behind on payments, eases your cash flow concerns, and keeps you solvent – no matter what.

You could even connect payments to project milestones. As each milestone is met, another payment should be triggered for the next stage of the project.

Avoid Overspending

Liquid cash is crucial for maintaining positive cash flow. Tying up your money in large, upfront purchases of materials or equipment can restrict your ability to manage unexpected expenses, such as repairs, delays, or additional project costs. Instead, consider financing options or negotiating payment terms with suppliers to spread out costs over time.

Although financing may come with interest and charges, it allows you to stay cash-rich, ensuring you can pay staff, meet operational expenses, and seize new opportunities. Moreover, some financing fees can be classified as allowable business expenses, offering tax benefits that help offset the cost.

Ask a Credit Agency to Evaluate Clients

Some clients pay invoices late, no matter what. They may have cash flow problems of their own. Use a credit agency to investigate the financial status of your clients ahead of time to ensure they can pay their bills before they’re due.

Another alternative is to give clients more options to pay. For example, standing order payments might speed up the collection process. You want to avoid later or missed payments that can lead to negative cash flow problems.

4PS Construct is an industry leader in cash flow in construction. Our systems provide a comprehensive overview of your business’s cash flow, supporting procurement, invoicing, estimating costs, and much more. We ensure you receive daily reports covering your company’s cash flow. Each report details which activities are completed, letting you know which invoices you need to chase.

Want to learn more about construction cash flow management? Download the whitepaper, ‘7 Ways How to Maintain a Positive Cash Flow in Construction’ and get industry-proven tips for your business.

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