You’ve likely heard the saying “Cash is King!”, and this statement rings true even more during uncertain economic times. Successful companies keep a watchful eye over their cash flow, often through some relatively simple but essential disciplines. Below, we outline five strategies that can help construction companies navigate uncertain economic times by gaining a better handle on cash flow.
1. Cash Flow Forecasting
Given the unique cash flows associated with performing construction contracts, creating and maintaining a detailed cash flow forecast allows companies to better anticipate and react to potential future cash needs. This process involves estimating when companies will receive customer payments and when expenses will be incurred and paid. We recommend focusing on a short-term forecast (e.g., 12 weeks) to give companies visibility into the immediate cash needs facing the business in the next 2-3 months. Accurate forecasting helps prioritize projects that pay quickly at higher margins and adjust plans for those with uncertain payment timelines and low margins.
2. Billing and Payment Processes
Efficient billing and payment processes are vital to maintaining a healthy cash flow. The back office should work closely with the field to ensure the company is aware of and captures all costs they need to bill during a given month and that they prepare the invoice timely. Once bills are submitted, instilling a discipline of regularly reviewing outstanding invoices and actively following up on overdue payments can help reduce the risk of prolonged cash flow issues due to delayed payments.
3. Change Orders
Ignoring the benefits of a well-defined change order management process could lead to disputes and lost profits. Timely negotiation and documentation of change orders are critical for ensuring customers compensate construction companies properly for additional work or modifications to the original project scope. Negotiating change orders early on before companies complete the work helps maximize profitability.
4. Supplier Relationships and Expense Management
Maintaining favorable relationships with suppliers and managing operating expenses are crucial to cash flow stability. Negotiating extended credit terms or early payment discounts with suppliers can help companies manage cash outflows more effectively. Many general contractors utilize a “pay when paid” model to ensure their cash outflows align with cash inflows. Lastly, reviewing operating expenses and identifying areas for cost-cutting without compromising quality and safety can also contribute to overall financial resilience.
5. Lenders and Investors
Transparent communication with lenders and investors is essential for maintaining credibility and securing additional funding when needed. Providing stakeholders with realistic cash flow projections and demonstrating how companies will repay funds can increase the chances of obtaining additional working capital at favorable terms. Waiting until a crisis to seek additional funding will often lead to higher borrowing costs and limited options.
Cash flow management is fundamental to running a successful construction business, especially during uncertain economic times. By implementing these best practices, construction contractors can better prepare themselves for potential challenges and ensure financial resilience. Planning, maintaining open communication, and being adaptable are vital strategies that help construction companies navigate challenges in the industry and emerge stronger.