The way you manage your construction business’ finances affects the success of the venture. In general, if you manage costs effectively, you will have a strong business foundation. Remember, positive cash flow gives your business interest protection.
Cash Flow Ideas Redefined.
Cash flow is defined as the money being transferred in and out of a business. Cash here refers to the amount that is being sent to by paying clients and customers. In some cases, cash flow in a company is sourced from the accounts receivable. When we say accounts receivable, we mean the amount due to the company for any rendered service or provided products.
Your company’s cash flow essentially dictates how likely the business is to succeed. Thus, if you aim for trade stability, you should maintain a positive cash flow. Proper planning is needed to control the budget. This, too, helps reduce the risk of business failure and promotes profitability.
One of the best ways of maintaining positive cash flow is planning the costs of a business. Here, you have to prioritize your income and expenses. This might sound difficult to do but it is actually achievable, especially if you use the tips down below.
How to Have Positive Cash Flow in Construction Management
- Check the Financial Capability of your Client
When you do business and transactions with clients, one thing you should always keep an eye with is their ability to pay you back for the due amount. Make sure your clients are able to pay you for any completed work.
- Be Profitable by Offering a Realistic Project Estimate
Your construction business will only give you profit if your cost estimate is accurate. With this, you have to do an approximation of direct expenses and overhead expenses. This way you can do a realistic calculation of how much you would be spending on a project and how much would your profit be. Remember, overhead expenses are generally added as a percentage of the sum of equipment.
As you do not want to work on a project that won’t give you profit, be certain with every deal that you are going to have. Practice good business judgment.
- Look for Great Supplier Deals
Years in business would tell you much about this. Suppliers are always everywhere and they can have deceiving offers. As such, you have to be wise enough in choosing who to work with. Examine their offers. Ask questions concerning deals. Look for the one who can give quality materials at a reasonable price.
- Strategize by Spreading Costs
Not all suppliers are capable of giving a huge discount to your business. With this, it would be better to opt for payment terms and financing that would not break your finances. While it’s true that it comes with interest, this strategy can improve your cash flow by spreading out your payables at the moment. Too, it can make your budgeting easier as you would be left with an amount that can be used for other operating costs.
This same strategy can also work for your subcontractors.
- Have a Cash Flow Plan for Future Operations
In construction, the varying degree of works to be done as well as change order on ongoing projects can affect your cost management plan. Consider the estimated length of the project and create a cash flow forecast. You can start by projecting how much work can be covered within a week or on a monthly basis. You must include the estimated expenses for each scope. The allotted costs for suppliers and subcontractors on a particular period of time must be taken into account. Once you have the actual receipts and disbursements, you can compare the budget with your projected cash flow and make the necessary adjustments in order to come up with a more appropriate plan for the future.
- Get your Clients Pay you on your Terms
Set a billing schedule that keeps your company in the best position. Favorable contract terms can be negotiated. Do not forget to always ask for a deposit before starting any project. This can help you get a guarantee that your client would keep up with your project agreement.
You can also set for payment options such as getting the amount collected upon the delivery of materials to the project site. The use of electronic payment system could as well be considered. This allows you to receive money faster and increases your cash flow for the day-to-day project expenses.
- Manage your Receivable Accounts Promptly
Get the necessary documents for your receivable payments ready and accurate. You can set a timeline for your receivables. Say, for example, amount due must be settled within 30 days or even earlier than that.
Proper negotiation can settle your cash flow objective. Avoid delays. Make sure you are submitting your documents to the right person. Be aggressive in collecting payments for works that have been done and signed off. In the event that you are left with no option to speed up payment collection, be consistent in reminding clients that they owe you money. If calls and emails fail, then you can take the next step to file a claim.
You can also consider sending out an automated invoice. Keep in mind to send them ahead of time. Every minute you spend chasing them can be used on something else that is more important for your business growth.
- Hire Subcontractors that Requires Payment on a Monthly Basis
In construction, employees are usually paid on a weekly basis. This varies a lot from the payroll method of each business. Hiring subcontractors who are often paid on a monthly basis can help you improve your cash flow. It can cut down your expenses because subcontractors are the sole responsible for claiming, filing and paying their local and federal taxes and get the skilled labor that you need to accomplish the job.
- Be Firm on your Terms of Change Orders
Change orders can affect your cash flows more than you anticipated. While it is considered as a common occurrence in the construction industry, this can still be avoided.
Never let your cost management plan get affected by this. Let your customer sign an agreement where extra work is to be noted and paid for. You must also have a plan on how to process change orders immediately so that the payment can be received quickly as well.
- Closeout Completed Projects Properly
Closing out a project is crucial. However, this is something that is oftentimes overlooked. You can’t walk away unless all parties are in agreement that the entire project has been completed. This final step includes finalizing punch lists and submission of all the necessary documents that will conclude all your contractual obligations. This is why proper planning is vital from the earliest stage of the project so that the closeout process will be easier.
Projects vary from one another. Strategizing according to the kind of construction projection that you have is a must. This is to help you improve your business and be in control of the budget from time to time. How you manage your business accounts makes a lot of difference. If you want to be steps ahead of your competitors, consider the above-listed tips.