How to effectively manage cash flow in the construction business

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Managing cash flow is not easy for any enterprise, but construction companies are likelier than others to complain about slow, delayed, and preliminary payments. In a survey of building firms conducted by Levelset, it turned out that 9 out of 10 construction companies agree with counterparties on payments up to 30 days later. Still, only 4 out of 10 enterprises receive funds into the account during this period.

Successful work with cash requires using precise and up-to-date financial documents, creating forecasts, and studying capital movements at different stages of project implementation. Entrepreneurs should regularly consult construction bookkeeping experts who are well-versed in various types of economic activity.

The definition of a cash flow

Cash flow is an essential parameter in any business. Business owners put money and cash equivalents in and out of an organization. A positive cash flow indicates that the company's revenue is more significant than its liabilities, which means it will eliminate all of its debts and generate income.

If a company has a negative cash flow, it does not have enough funding to settle with all counterparties. Any qualified accountant will tell you that a negative cash flow shows the inefficiency of the chosen financial tactics and the need to change it.

The main problems with cash flow in construction

Many construction companies are forced to form a complex system of payments, which leads to a delay in the flow of capital, which means cash flow is also disrupted. Entrepreneurs who have been working in the construction business for a long time complain about such challenges:

• Slow sending of invoices: the faster the client receives the bill, the faster the funds will be credited to your account.
• Too fast settlements with counterparties: paying all bills before informing customers about them can lead to a cash shortage. Early payments can make a business vulnerable to any force majeure event.
• Excess resources: if contractors purchase large quantities of consumables, this can decrease the funds available for other tasks. It is critical to accurately calculate the needs of each project and determine the optimal volume of reserves.

Construction bookkeeping specialists will advise entrepreneurs on achieving optimal payment terms and explain how to create a force majeure plan to decrease the risk of losses.

Basic rules for working with cash flow

Sometimes people in business think that bookkeepers are only doing financial reporting. In reality, professionals can give valuable advice on increasing profits and cutting costs.

Construction firms must optimize procurement procedures and other transaction costs to generate stable cash flow and significant income. Let's talk about how companies in this industry can make their operations more profitable:

• Create accurate forecasts to determine the sources of income and expenses: such information will help you determine when there may be a surplus or shortage of resources to avoid violating the accounting equation.
• Specify in contracts clear terms of billing and payment: consider the peculiarities of the movement of capital in the area when signing contracts. The payment schedule should rely on the initial cost of attracting resources, e.g., payment for materials should occur after they are delivered to the work site.
• Don't forget about tax liabilities: hefty tax payments can slow down the development of your building company. Accurate construction bookkeeping and tax planning during the financial year will help to avoid penalties.
• Encourage partners to pay their bills early: While raising capital early can sometimes lead to a long-term funding gap, fast payments often help generate positive cash flow.
• Build an emergency fund: it's essential to build a cash buffer in case of sudden drops in customer activity. Determine the average business expenses over 30 days and set aside cash to cover the costs for at least three months, assuming no capital flow.

It is vital to ensure construction bookkeeping specialists, project managers, and other stakeholders collaborate to ensure optimal capital management in the construction industry. To effectively implement projects, try to coordinate the activities of all departments and add the most modern methods and systems.

How BooksTime can help

BooksTime offers financial services to firms across various industries, and brokerage firm Center Realty Group (CRG) is one of its regular clients. The company's management delegated some of their routine construction bookkeeping to BooksTime specialists so CRG employees could focus on interacting with clients. In addition to standard responsibilities, the dedicated experts reorganized Center Realty Group's financial data, ensuring the safety and correct classification of information.

If you also used BooksTime services and were satisfied, we recommend telling your friends about this cooperation because the company offers a profitable referral program. Each newly attracted user will receive a $200 discount on their first account, and the same bonus awaits you during the following settlements with the company. If you draw more than five new customers, you will receive a monthly discount of $100. It's time to establish a profitable interaction with BooksTime.

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