Having an effective cash flow system is the heartbeat of any successful business. This is especially true in a construction business where managing cash flow between different projects can mean the difference between success and failure of your business.
We’ve put together a few tips and tricks that can help you manage your cash flow to ensure your construction business remains profitable across all projects.
Understand your customer in construction
As a business owner, it is always ideal to work with contractors and customers who know how to process your paperwork, provide approval on work completed, and pay for services soon after completion. Knowing your customer’s creditworthiness by reviewing their financial statements or annual fiscal reports can help you understand how they have worked in the past and guide you on how to manage your relationship with them. It is important to know that they will be able to pay for the work you complete for them, even before you begin. The more you know about your audience and customer, the more effective your marketing efforts will be. Take whatever data you have, and try to develop a character profile as if your ideal customer were just one person. Give him or her a name and describe what his or her life is like. What do they need and how can your construction offering help them.
Manage your cashflow
Create a reasonable cash flow forecast for each of your projects. Depending on the length of the project, plan out how much work will be completed each week or month and how much you can invoice for. Remember to consider how much you are set to pay vendors so you have an estimated idea of how much cash you will have at every stage during your project. At the end of each project, compare your forecast against your receipts so you can improve future forecasts and in turn, better manage your cash flow.
Be realistic about your profitable estimate
You should never consider taking on a construction project that will not be profitable for your business. Managing your cash flow on profitable projects is difficult enough. You always have to avoid moving funds from one project to pay for another just to keep an unprofitable project going.
Negotiate contract terms in your favour
It is important to ensure that the payment terms you agree on are in your company’s best interest. The invoicing schedule you should prefer is one that reflects upfront costs that set the project in motion, such as being paid for materials when they are delivered rather than when they have been installed. Come up with a schedule that works for you and your vendors so both parties have an understanding and you can avoid having disputes about money and payment terms throughout the project.
Always check Change Orders
Change orders can have a big impact on your cash flow so it’s important to know what you can and can’t charge for. Change orders should be clearly established in the contract. Keeping on top of and documenting the extra work completed is essential. When working with a designer, is there a specific change order root cause that’s more frequently attributed to errors, omissions, etc.? Are there items that seem to be routinely missed in specifications when working with specific teams? Ask questions. double-down on the detail.
Be strict about collecting payments
It is always good to have your accounts receivable down to 40 days or less, however, this may not always be the case. When invoicing customers, ensure you have all the correct and necessary documentation and that you are submitting to the relevant people so you can avoid delayed payments. Do not be shy when requesting payment against an agreed contract.
Close the Project
Closing a project and collecting payment can be tricky at times. Effectively managing the final punch list can improve the timeliness of the final payment. With the help of Lulapay, you can collect payments upfront and we can offer your debtors payment terms with us. Read more about how this works here.
We hope that these tips and tricks that can help you manage your cash flow to ensure your construction business remains profitable across all projects. For better cash management and funding to manage or grow your construction business, contact www.lula.co.za