11 ways to improve cashflow for your construction business
Tom Cruise said in the 1996 film Jerry Maguire - “SHOW ME THE MONEY!!!”
All jokes aside, a business without cash, fails.
A construction company operating at a loss might fail.
But a construction company that has a consistent negative cash flow will fail.
For your company to survive. You need cash. Cash flow is the most important financial factor. You could have great revenue, expenses and income but without the careful management of your cash, you could be running at a negative cash flow.
As I said, a company without positive cash flow will go bankrupt. No business model, industry or superstar entrepreneur is safe. But construction companies have a particular sort of challenge. One which I’m sure keeps you up at night.
Without cash flow you won’t even be able to complete the simplest of tasks: paying your monthly expenses.
1- Use cashflow management software
Upfront planning helps prevent payment problems. Use your cashflow management software to project future income. This will give you a clear view of what income and expenses are expected in the future.
2- Send invoices immediately
Send your invoices late, you’ll get paid late. Send them early, you might get paid early or, at least, on time. Set up a system to automate the sending of invoices. This is one of the easiest solutions, yet one of the most forgotten by SMEs. Send your invoices immediately, please.
3- Organise your payroll properly
Compared to most SMEs, construction company payroll is tough. Employees, often, get paid every two weeks. Subcontractors, who get paid every four weeks, are another line item on the expense sheet - although, they do improve cash flow. If your business is dependent on subcontractors, you’ll need to set up your payroll differently to your competitor with a company of full-time employees. However, it’s likely that you're a hybrid of the two, so make sure you’re on top of your payroll. This could improve cash flow a lot.
4- Manage the supply chain
Similar to point 3, you need to manage your supply chain efficiently to improve cash flow. The construction supply chain is often the reason contractors and subcontractors go bankrupt. If your subcontractors don’t get paid and go out of business, who is going to finish the work? Paying your subcontractors on time is essential.
5- Get the best prices
Let your supplier know you’re shopping around. They’ll know you’re looking for the best deal possible. By reducing costs, you’re freeing up cash to use on other parts of the project.
6- Spread out your expenses
Unless you’re receiving a steep discount, when purchasing materials and supplies you should use financing. You’ll pay interest, but payments will come monthly, leaving your with more cash in the business for operations.
7- Electronic payments
If you can, accept electronic payments. The money will be received faster, increasing cash flow and allowing for more of your money to be used for day-to-day operations, paying subcontractors, and growth.
8- Avoid under and over-billings
Under billing and overbilling isn’t a good option, ever. Unfortunately, some companies do it and then end up with serious cash flow issues. The best approach is to bill for the work that’s been completed and no more. You’ll feel the urge to bill for future work but you’re frontloading cash flow now and risk having less later on. Keep it simple.
9- Negotiate on payment terms
It usually takes between 60 and 90 days to get paid in the construction business. That is a long time! A long time. If you can negotiate payment terms upfront, do it. How? Send immediate invoices, offer payment incentives, write clear terms, check credit reports before making any deals, and restructure terms with non-payers.
10- Lease, don’t buy
Yes, leasing - in the end - is often more expensive than buying. This is why many companies avoid leasing. Leasing let’s you pay in small monthly increments to help cash flow. If your company isn’t flush with cash, lease - because you’ll need the money for day-to-day operations. Plus, lease payments are a business expense you can write them off against your taxes!
11- Increase your prices
This might sound obvious, but if you increase your prices you’ll have more cash available. But this scares many business owners. Unless you’re bound by industry standard pricing, it might pay to experiment a little. There’s no way to know whether your prices are too high until you test them.
If your operations run smoothly and efficiently, it’s likely that you’ll have good cash flow. So focus on that first. If you’re still struggling, it’s likely that something outside of your control is harming your cash flow. That’s where CreditStretcher comes in. CreditStretcher gives you 60 days of interest free credit (increase to 90 days for just 1% of invoice amount) when you do business with a subcontractor.
If you want to pay them now but want to use the cash you have available to purchase equipment and materials or pay your full-time employees, then CreditStretcher could help you.