How to manage cash flow in the construction industry

We all know the saying ‘cash in king’, and that’s very much the case in the construction industry.

A construction company’s cash flow is a reflection of its overall business state. Negative cash flow can lead to financial difficulties, and even to a company’s demise.

Unfortunately, the construction industry – which already deals with long hours and demanding work – also suffers its share of cash flow problems. It’s an issue that affects the industry as a whole and leaves business owners struggling to pay employees, themselves and their bills.

According to a recent study, 61% of construction companies experience cash flow issues and one in five construction businesses say that cash flow remains a regular problem.

Meanwhile, more than half (53%) of construction professionals say they are not satisfied with how quickly they are paid for their work.

In order to manage cash flow in construction businesses effectively, it’s important to understand the reasons behind these issues and how to address them. This article will look at cash flow issues in more depth and offer tips on how companies can better manage cash flow in the construction industry.
 

What is cash flow in construction?

In general business terms, cash flow is the movement of money in and out of a business (aka income and expenditure). If more money is coming into the company than going out of it, then it has a healthy cash flow. But if more money is going out of it, then the cash flow will be negative.

However, in construction, cash flow can mean different things. Client cash flow refers to analysis of when costs will be incurred and how much they will amount to during a project’s lifespan. The ability to predict cash flow is vital so that the right level of funding and draw-down facilities are in place.

While contractor cash flow is the money coming in to pay suppliers and subcontractors. If payment is delayed along the supply chain, it can have a negative impact on a project.

Tips on how to manage cash flow in construction

In construction, projects can change on an almost daily basis. The key to survival is having control of your cash flow and managing it well.

Here are eight tips on how to keep that cash flowing in your construction business in the right direction.
 

1 Get to know your client really well

Don’t just say you’ll work with someone because it sounds like a good deal. Make sure they are going to be able to pay up on time by doing some research into previous projects. Get references from those they have worked with in the past before you sign any contracts.
 

2 Know what changes are happening and their impact

Changes to an original plan are part and parcel of working in construction. But they can also make it hard for businesses to control their cash flow. Even the smallest of changes need to be recorded and their impact on the wider project assessed.
 

3 Keep clients well informed

There’s nothing worse than a disgruntled customer. So, when changes occur, make sure you keep customers in the loop quickly and in accordance with the terms of your contract.
 

4 Don’t give up the chase

If customers are late paying a bill, don’t be afraid to ask for the money. Some clients will put off making a payment until they are asked to do so (in some cases they need to be asked multiple times).

Construction businesses need a system in place that alerts them to missed payments and ensures that money is flowing into the bank as soon as possible after a job is completed.

5 Think about leasing new equipment (and selling the out-of-date stuff)

This won’t apply to every construction company, but if you have old machinery that is rarely used, it might be worth selling it to increase cash flow. It’s nice to think that these items might come in handy one day, but that is seldom the case.
 

6 Perform cash flow projections

Get into the habit of performing cash flow projections.

To create these forecasts, you’ll need to work out how much work you’ll complete in a given month, how much you’ll be able to bill, and how much you’ll be required to pay suppliers and subcontractors.

Once a project is over, compare your projections with the actual receipts and expenditure to ensure future projections are more accurate.
 

7 Be more organised

A bit of organisation can get you a long way in the construction industry.

Even if you have profitable projects lined up and are forecasting a successful year, that may not lead to you feeling particularly flush. If you are not paid on time and don’t have anyone else to turn to, things can quickly feel pretty tight.

Keep on top of your accounts and make sure you and your staff are not left short because a client is late making a payment. Good organisation also means having the right paperwork in place – for example, tradesman liability insurance to keep you and your business protected.
 

8 Negotiate the best terms for your business

The schedule and terms of payment should always be in the best interests of your company.

You’ll need a certain amount of upfront payments and be ready to bill during the course of a project to ensure labour costs are met and vendors and subcontractors are paid. Take the needs of the customer into account, but when it comes to cash flow, always put your own needs first.
 

Protect your construction business with tradesman liability insurance

Every construction company wants to increase its cash flow and should take the necessary steps to ensure projects are completed and cash keeps flowing.

As a tradesman, it’s important you have the necessary insurance cover in place to protect you against various eventualities. Tradesman liability insurance provides specialised cover for legal costs, equipment and subcontractors.

Whether you are a sole trader or an established construction firm, at Insurance Choice, we can arrange cover that is tailored to your trade and business requirements. Get in touch with the team for a quote on tradesman liability insurance today.