The construction industry has some of the longest lag times in the industry when it comes to payment of invoices. If you are a smaller company or subcontractor, this can have serious cash flow implications for your business.
There are some industry specific strategies that can be undertaken to help your construction business to survive and prosper despite these issues.
Clear Communication and Quoting
Disputes in the construction industry are common and so you want to find someone who has a good reputation that is easy to deal with. Do your research by talking to past suppliers, consider the last project they were involved in and how they did.
The other side to this story is to make sure you accurately research your own costs. Accurate quoting helps prevent nasty surprises down the track as well as helping ensure maximum profitability.
Underquoting in the hope to get a certain job is a surefire way to create serious cash flow issues for your business. Cheap jobs can signal low quality and so does not guarantee you will get the bid. Accurate estimations of your costs and a markup should be your main benchmarks for pricing to ensure positive cash flow.
Cash on hand is a valuable asset and should not be used as a default source of funds for general payments. One strategy to help improve cash flow is to keep cash for emergencies and use credit to purchase materials needed for construction. It is worth taking the hit via interest payments for the flexibility and ability to have emergency funds via cash reserves.
Always Look for the Best Prices and Control Costs
Securing long term supplies of essential materials at low cost is a great way to help your cash flow. If you have carefully considered the project and accurately predicted how much material you need, this can be then purchased in bulk ahead of time for significant savings.
Careful monitoring of the current market prices for materials starts with having solid relationships with your suppliers. Taking the time to shop around and using the natural competition amongst suppliers is key to saving on costs. Review your fixed costs constantly and look for ways to remove or reduce them. Always negotiate with your suppliers for better terms.
Timing and Forecasting
Timing is crucial when trying to improve your cash flow. Careful planning at the estimations stage that is data driven enables you to quote properly and structure payment timings at crucial junctions.
Remove as many barriers as possible to payment. Have all relevant evidence and invoices ready so that when payment is due, it is processed promptly. If you’ve done the work and the delay is on the other side, assert your rights and receive payment for services rendered.
The reality of construction work is that it is in stages. However the actual payment may be after the final stage is completed, meanwhile subcontractors and suppliers are paid in accordance with progress payments. Unexpected payments will cause negative cash flow with impacts felt for weeks or months afterwards.
Streamlining your forecasting process should start with a basic outline of the costs of the job. At a minimum, you need to consider a basic project management estimate or a cash flow spreadsheet. There are also professional solutions to these but that is not necessary. You will have much more accurate quotes as long as you have a system that takes into account - materials, costs and labour for each job to start.
Be aware of Cash Flow Drains
Payroll is going to be the major drain for most companies. There is generally not much leeway in delaying any payments to your employees although certain payment terms offered to subcontractors like 'paid-when-paid' clauses can help delay these payments.
You should also take into account timing when paying your suppliers. Paying bills too early is just going to tighten up your options. Consider the payment terms you have and pay nearer to the due date as much as possible.
Planning to Succeed.
Cash flow management in construction is all about proper planning. Accurate quoting based on cost calculations, a realistic understanding of how the construction industry operates, a focus on looking for the best prices and negotiation with suppliers constantly, and taking into consideration project-specific timings and avoiding cash flow drains is the key to keeping your construction business cash flow healthy.