Methods for Increasing Cash Flow in the Construction Industry

Methods for Increasing Cash Flow in the Construction Industry

Oct 20, 2021, 3:47:43 AM Business

One of the most obvious reasons businesses fail is because they run out of funds. Construction companies, which often advance a large portion of their project's expenses prior to issuing the first invoice, are particularly susceptible to this. That is why controlling cash flow is critical for construction businesses. Without good cash flow, a construction firm may be unable to pay its bills, regardless of the number of new contracts lined up.


What Is Cash Flow Management?


Cash flow is a critical metric in business. It refers to the quantity of cash and cash equivalents that get in and out of a company at any one moment.


Positive cash flow businesses have more assets than liabilities. This enables them to remain in the black and pay their monthly expenses. In comparison, individuals with negative cash flows lack the necessary funds to meet their monthly commitments.


As stated before, negative cash flow indicates that a firm may be experiencing financial difficulties, which, if not addressed, may result in the company's eventual demise.


While doing this may be difficult, there are a few methods construction and contracting firms may use to go from the red to the black.


1. Costs are spread out


Never pay cash for goods and materials unless you are getting a substantial discount. Rather than that, ensure that you fund these items. Numerous vendors provide financing alternatives to contractors, including credit cards, lines of credit, and loans.


Naturally, you will be liable for financing costs and interest. However, you will not be out of money for the whole sum since you will be required to make monthly payments. This results in the company having more cash on hand to continue functioning. Additionally, you may be eligible to deduct interest and other fees as business expenditures.


2. Speculate on Future Cash Flows


Making predictions regarding your future cash flow is not simple. Undoubtedly, construction is a bit more complex than other businesses due to the changing degrees of tasks and modification orders on ongoing projects.


Appropriate preparation in advance of these situations will assist in avoiding payroll and payment issues. One method to do this is via the use of cash flow management software. By using these techniques, construction firms may get a broad understanding of the revenue and expenditures they might anticipate in the future.


3. Fixed asset leasing vs. financing


Leasing vs. financing fixed assets boils down to a business's objectives, goals, and the amount of cash it needs on hand. Asset Disposition is the process of borrowing money from a bank or lender and repaying it with interest. Once the loan is repaid in full, the business owns the equipment and may be able to resell it if it is no longer needed. There is no ownership at the conclusion of many months or years of monthly payments with leasing. Leases are often less costly than financing from a monetary standpoint.


4. Accept Payments through Electronic Means


While cash is king, ensure that your company accepts a variety of payment methods, including electronic payments. This guarantees that your company receives payments more quickly, which improves cash flow and frees up money for day-to-day operations, payables, and expansion.


5. Tax preparation


A large tax payment may have a detrimental effect on a construction company's cash flow, even more so if it occurs during sluggish times. Proper tax planning, in conjunction with construction cost control and knowledge of tax deferrals, may assist reduce or eliminate unexpected costs. Additionally, it is a year-round effort that, depending on the tax reporting technique employed, may help a business enhance its financial position.


6. Avoid Excessive and Inadequate Billing


Certain project managers take pleasure in charging excessively. Due to the fact that the invoice will be more than the value of the work done to date, current cash flow will improve. The downside to this is that it will result in a reduction in cash flow once the project is completed.


Cash flow suffers in the short term when businesses choose to underbill their customers. So what is the best course of action? The most efficient method is to charge according to the percentage of the job done.


Conclusion


Construction firms function differently than other types of businesses since no two projects are identical. As a result, increasing short term cash flow needs a variety of diverse methods.


Much will rely on the capacity of the project manager to manage cash flow. As such, employ a competent project manager or provide thorough cash flow management training to an existing project manager.


Apart from having the appropriate project management, a construction firm should do all possible to accelerate receivables, which improves cash flow.

Published by Sarah Jones

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