Pop quiz: how much does cash flow matter? The answer, as every construction business knows, is: a whole lot! Even excellent project performance, and plenty of work on hand, can not ultimately camouflage cash shortages. Cash flow makes or breaks construction companies, and growth requires cash. Build your stash by paying more attention to payment terms, upfront costs and planning.
Struggling to Make Payments?
Strong profitability, on paper, is great, but doesn’t help at all when it comes time to make payroll, purchase supplies, or honor commitments to subcontractors. If you are frequently struggling to make payments, it’s time to get to the root of your problems, which likely involves “failure to align contract terms with the reality of cash outflows.” Construction Pro Shauna Huntington points out that “neglecting cash flow planning during contract negotiations” is a common challenge, and suggests avoiding the problem, and improving cash flow by implementing these four strategies:
- Negotiate Front-Loaded Payment Terms: Request more favorable terms for the early phases of the project. For instance, negotiate accelerated payments in the first 6 months to cover startup costs.
- Require Upfront Deposits: A deposit covering initial labor and equipment outlays can ease the cash crunch until the standard payment schedule catches up.
- Use Financing Options Wisely: Consider invoice factoring or short-term financing to bridge the gap between project expenses and payment receipts. However, don’t forget to include the financing costs in your bid to maintain profitability.
- Educate Clients on Cash Realities: Some clients are open to adjusting terms when the reasoning is sound. Explain how payment structure affects your ability to deliver high-quality, timely results.
Huntington also advises developing effective daily, weekly and monthly processes for keeping tabs on finances, and acting on the data to course correct before cash challenges turn into crisis. As she explains: “Key performance indicators (KPIs) like job profitability, equipment utilization, and labor efficiency help contractors make informed decisions. If you’re not monitoring your job costs and profit margins, you could be taking on projects that lose money.” Specific examples of monitoring and validating financial data regularly include:
Daily or Weekly Tasks
- Reconcile job costs, invoices, and bank transactions.
- Review automated transactions for discrepancies.
Month-End Close Tasks
- Reconcile all accounts to month-end supporting documentation (statements, reports, etc.)
- Analyze job profitability and financial trends to make data-driven decisions.
- Verify that all expenses are categorized correctly to prevent misreporting.
Good To Do: Convert Short-Term Assets To Cash
Poor habits related to cash management add up. If you have not had time to deposit a check or two, haven’t even begun to invoice on one or more projects, or aren’t organized to regularly collect payments, it’s time to change your ways of work. At GB Financial Services, Gary Bartecki emphasizes that quickly converting short-term assets into cash, makes a world of difference in construction, and offers these pointers:
- Cash needs to be on a worksheet by week including dates when payments are due.
- Cash needs to be prioritized so you make the right payments at the right time.
- Review the billing process to see if you can speed up invoices by a week or two.
- Be told what checks or payments came in that day and whether they have been deposited.
- Actively chase your money.
- Immediately resolve any billing issues.
- Track days it takes to collect ( 30-40 day range)
- Calculate days sales outstanding and review monthly.
- Assign responsibility for these tasks.
- Remember, CASH IS KING, but more cash is better.
Solid Foundation: Surety Bonds
In construction, surety bonds are more than mere paperwork; they’re a testament to your financial stability and commitment to completing projects. Colonial Surety Company helps construction companies of all sizes improve bidding capacity, and demonstrate reliability. Our Hometown Bond Program provides local builders with credit based underwriting bonds for up to $250k—no financial statements required.
Got something bigger in mind? No problem. We’ve got something special for you too.
Receive Free Business Credit Scores instantly, just for submitting an easy, speedy Pre-Qual for a surety line of credit in writing. Once qualified, welcome new projects in, as you leverage all the benefits of The Partnership Account® for Contractors, including:
- Written Bonding Limits: Receive your single and aggregate bonding limits in writing.
- Instant Bid Bond Issuance: Gain the ability to issue your own bid bonds within minutes, using our powers of attorney.
- Real-Time Visibility: Use your private dashboard to view your underwriting profile and insightful financial data in real-time.
Surety Bond programs for construction businesses of every size are right here:
Bonding Programs at Colonial Surety Company
Founded in 1930, Colonial Surety Company is a leading direct seller and writer of surety bonds and insurance products across the USA. Colonial is rated “A Excellent” by A.M. Best Company and U.S. Treasury listed. Let’s connect today: Colonial Surety Company.