In any business, cash flow and net profits are an essential part of ensuring your company stays afloat. Net profit, or your bottom line, describes the profit your business earns by providing goods and services. Construction cash flow is the money that comes in and goes out to keep your business operational. While both numbers are critical components to your successful business, there are a variety of reasons cash flow issues might arise in the construction industry.
Substantial cash flow is critical to the way construction projects work. From the moment you bid on a project, you must be prepared to meet the costs required to fill the terms of your contract. Yet, the very nature of construction billing can make this difficult. General contractors must be prepared to purchase supplies, pay vendors, pay subcontractors, and handle the cost of unexpected changes at any point during a project. For this reason, it's essential to develop a system that will help you manage your company's cash flow even when payments are often delayed. This guide will help you understand the most common cash flow issues in construction and some solutions to avoid cash flow shortages.
5 common construction cash flow issues
It's easy to see that cash flow in construction can bring about challenges that might not arise in other industries. After all, it's not a simple process of working on a routine schedule to get paid weekly or monthly. Payments depend on various factors and projects undergo many changes between crafting a bid and finishing a major project. Consider the way these common issues affect cash flow for construction companies.
1. Paying bills early
Construction companies deal with monthly bills from vendors, equipment costs, materials, and change orders. While staying on top of things might seem like the best way to avoid the consequences of ongoing debt, paying bills too early can leave you with limited cash flow. By paying bills early or paying your vendors before you get paid, you're placing the financial burden on yourself.
2. Joint ventures
Construction projects are often completed by multiple companies. While this is generally expected and usually necessary, it does increase your level of risk. When you work on a project with other companies, their behavior affects how and when you get paid. If any partner fails to live up to their obligation or backs out of a project, the entire job (and your payment) could be jeopardized.
3. No advance payment
Your bid for any project includes the cost of materials, planning, and labor to complete the entire structure. If you don't include any advance payment requirements in your contract, it's your responsibility to foot the full cost of getting the project off the ground. Requiring an advance payment will provide you with cash flow to get the project started and float the company until money starts coming in.
4. Â Poor (or no) Credit policy
On the other end of the spectrum, it's important to consider how the companies that you work with operate. Construction is a credit-heavy industry. If you don't have an established credit policy in place, you run the risk of making a poor credit decision or losing business from reputable vendors or contractors. Your credit policy should minimize the time between payments and have terms that make it enforceable.
5. Lack of change order management
Change orders are a necessary evil in any construction project. Yet, the fact that they're expected doesn't make them easier to deal with. A change order usually changes the scope of a project as well as adds on costs for completion. Without the proper documentation and billing for change orders, you risk getting underpaid. Proper change order management provides a specific structure to avoid payment issues.
Solutions for cash flow issues in construction
Cash flow is important in construction to fund new products, hire essential subcontractors, replace equipment, deal with unexpected expenses, and grow your business. Learning about potential cash flow issues can help you find solutions that will keep your construction cash flow system on track. Consider how these solutions will help improve your construction billing process and provide funding when you need it most.
Include payment terms in contracts
A contract is the document that dictates the terms of any project. While it includes the terms contractors must follow to complete a project precisely, it should also include payment terms, and specific terms related to change orders, retainage, liens, and any other details that could lead to delayed payments. When many projects span months or even years, it's crucial to dictate reasonable terms of payment to ensure everyone gets paid in a timely manner.
Utilize construction technology
Many of the issues related to payment delays in construction are finally being recognized, and new solutions are emerging to address these issues. Companies that utilize technology and software designed specifically for construction benefit from a variety of tools that streamline complicated processes and you avoid mistakes that arise from human error. For instance, when you use construction billing software such as Trimble pay, formally Flashtract, you can automate essential documents, create custom workflows, and send out automated pay app reminders. Construction accounting software provides you with ways to keep track of accounts receivables and payables, purchase orders, and work orders while incorporating issues unique to construction, like change orders. Invoice management works to assist your business with managing expenses and billing to avoid unnecessary delays and cash shortages. When these technologies integrate seamlessly, you can benefit from a variety of solutions that help your team save time and avoid costly mistakes.
Find dependable funding sources
Construction projects are filled with variables that mean the only thing you can really expect is the unexpected. When unexpected expenses arise. you need a solution you can count on to help you avoid delays. Slow billing, change orders, and equipment requirements mean it's practically impossible to successfully maintain and grow your business without securing efficient financing options. By utilizing a seamless financing experience designed for the construction industry, you can choose from options for working capital, material, and pay app financing.
Cash flow can be challenging in the construction industry. With so many factors that can slow down your business, it is important to maintain payouts. With Trimble Pay, you can not only avoid many problems that slow construction cash flow, but you can also apply for funding. To learn more about how the growth of construction technology can help you eliminate cash flow problems for your construction business, schedule a demo today.
