Construction businesses run into cash flow problems for a variety of reasons. Maybe project managers underestimate expenses or overestimate the amount of materials needed to finish a job. Maybe the client or the general contractor on the job isn’t paying in a timely fashion, with net 30 routinely turning into net 90. Whatever the reason, cash flow problems can severely impede a construction company’s workflow.
Without cash on hand, business owners are unable to reinvest in their companies. As such, they are unable to grow. When their funds are tied up, construction companies are unable to take on additional projects because they cannot afford to pay more employees. They’re unable to invest in new physical assets. It can also be harder to afford the materials best suited for a particular project. At worst, these kinds of problems can force business owners to close their doors altogether.
Conquering Cash Flow Problems
According to a recent survey, 70 percent of small businesses have experienced late payments on invoices within the last year. Decision makers should do everything within their power to remain in the minority, making sure their companies are best positioned to avoid cash flow problems altogether. The following are six ways to do just that:
1. Stick to a reasonable schedule. While you can’t control the future, you can position yourself to be versatile enough to respond to unforeseen complications. Be sure not to stretch yourself too thin. You don’t want to find yourself in a situation where you are expected to pay for an enormous amount of raw materials when you have not yet finished a job you thought would have closed out last week.
2. Rethink your payment terms. At the end of the day, your customers ultimately care about one thing: that the job is done right. As such, you might want to consider asking clients to agree to front-loaded contracts. You need cash to complete projects, and it is not unreasonable to convince customers to give it to you up front, so long as you fulfill your end of the bargain. The last thing you want is to end up with negative cash flow, paying your staff out of your own pocket while you wait for a client to pay you 30 days after all pertinent documents are signed.
3. Consider offering an incentive. By choosing to offer your clients a slight discount if they pay their invoices early—one or two percent off if checks are sent within 10 days—chances are you will find your invoices will clear faster. Of course, you’ll have to sacrifice a little bit of revenue for that access to cash, but it might be worth it. Remember, once a payment is 120 days late, there is a 20 percent chance you’ll never collect it.
4. Hire fantastic project managers. As much as 85 percent of the cash construction companies have on hand comes from projects in progress. So, if your business manages all of its projects prudently, your company’s cash flow will be a source of comfort. Don’t forget that stellar project management starts and stops with the people you put in charge.
5. Shop your materials. The prices of raw materials fluctuate. New suppliers enter the market. From time to time, it might be worth checking around to see whether you could get a better deal elsewhere, or at least have your preferred supplier meet its competitors’ prices.
6. Make use of invoice clearing services. Rather than waiting what seems like forever for a check to come in the mail, you could also consider making use of a service that allows you to get the money more quickly on outstanding invoices. You are able to access the cash you’re owed right away, giving you the agility necessary to respond quickly to new opportunities.
Many construction businesses encounter cash flow problems, even if they’re just on a temporary basis. However, by taking proactive steps, you can reduce the likelihood these problems will occur, which means you will be flexible enough to take on more jobs and grow your business.