Cash Flow Management in Construction: Issues and Solutions

by AKG IT | Aug 11, 2021 | Bookkeeping

A proactive approach to cash flow safeguards against potential financial pitfalls and paves the way for sustainable growth and stability. Ultimately, by prioritizing efficient project management practices, companies can effectively navigate the complexities of cash flow management. Our comprehensive services at Stream Modular simplify and streamline transportation and coordination, providing reliable solutions for your modular construction logistics.

Achieving and sustaining a positive cash flow is a key component of financial health on construction projects and requires strategic foresight and diligent management. Managing your cash flow properly is key to running a successful construction business. However, it is not enough to simply calculate how much money you have at a given time. It is equally important to understand where your cash flow will stand at a future date.

Construction cash flow: All about cash flow in construction

Start by listing your construction company’s name and the period covered by the statement at the top of the page. Thankfully, many large clients and main contractors now recognise that suppliers are an extension of their business. Invoice clients in advance of works, offer payment incentives and restructure terms with non-payers to speed up cash flow. Set a shared goal of reducing costs and maximising income, particularly among quantity surveyors, project, and site managers who can influence financial decision-making. Regularly tracking and analysing activity in each of these categories will allow you to calculate projected net cash flow over a longer period of time. Most construction firms run cash flow reports for their organisation and/or each project they are working on.

Process change orders quickly when projects require more time, money, or resource than expected. They use data to understand income and outgoings margins, and profitability over a set period of time, or assess the financial health of their business. In this article, we cover the importance of cash flow in construction loans, how to calculate cash flow, and techniques for managing your cash flow better. There are great systems available for construction companies today which dramatically improve their ability to manage information and track what’s happening. This might be accounting tools, project forecasting tools, scheduling tools or project delivery tools. One of the hardest parts of construction cash flow is that projects don’t always go to plan.

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This helps you identify potential cost overruns early on and implement corrective actions. Construction projects often involve complex payment structures linked to project milestones or completion phases, leading to delays in receiving payments from clients. This delay can strain a contractor’s ability to cover immediate expenses, affecting the smooth progress of the project. When it comes to bill the customer for the remaining costs to complete the project, you can’t because you’re at your max. You don’t invoice the customer for all labor, materials, and services delivered in a billing cycle. This means you have more cash going out than coming in and could end up putting you in a position where you have negative cash flow for a certain period.

This can reduce administrative delays and enhance the overall speed of cash inflows. Simple, equitable adjustments to contract terms can be the difference between losing vendors or crew to late payment and having them happy to show up to work. If you need help putting together your construction company’s financial statements, many software programs and accounting firms can assist you. Next, construction cash flow compile a list of your construction company’s assets and liabilities at the end of the reporting period. Now that you understand the three financial statements and the elements that make them up, you can begin to put together your construction company’s financials. For example, if your construction company had revenue of $100,000 and expenses of $80,000, your net profit would be $20,000.