What Are Some Tips For Surviving Cash Shortages In Construction?

Managing cash flow is a crucial aspect to ensure sound functionalities for any business. However, construction companies find it differently challenging compared to smaller-scale businesses.

The structure, payment terms, and overdue receivable amounts quickly accumulate, forcing business owners to handle cash flow tactically and strategically. Moreover, choosing one formula for costing is a common issue that can land any construction company to break even and worse in some cases.

To prevent such scenarios, business owners must acknowledge the significance of cash flow statements throughout their operations. To avoid cash flow problems and make your business sustainable, there are some strategic actions to take. We will discuss such steps below.

Why must construction businesses maintain cash flow?

Cash flow is an essential instrument for every business. It is a part of finance and accounting, which keeps you updated regarding the cash and cash equivalents flowing in and out of your business.

When a company has more cash flow than their liabilities, it helps them cover its bills and make profits. Businesses with negative cash flow don't have enough to sustain. Moreover, not maintaining a cash flow often becomes one of the common reasons to have a negative statement. Check out the following point to prevent a negative cash flow statement:

1. Cash flow projection

If you make a cash flow statement based on the inflows and outflows you had already, it will give you a clear idea about incomes and expenses. However, to use a cash flow statement and prevent losses, you need to create a projection.

As the name suggests, a cash flow projection helps you analyse your cash flow possibilities for the future. An ideal cash flow projection records the number of possible inflows and outflows for the following three months.

Construction businesses have varying degrees of tasks and the probability of frequent order changes on ongoing projects. Such aspects make cash flow projections difficult for this industry. However, these reasons make it all the more important to rely on cash flow projections.

If you derive a general idea regarding incomes and expenses, then the anticipation of such events will prevent payment issues.

2. Spread costs tactically

Unless you receive a massive discount, it is best to not use cash for buying materials and supplies impulsively. It would help if you financed such purchases separately and then spent the money.

Many suppliers in the market offer multiple financing options. These can include the usage of credit cards, loans, lines of credit, etc. Of course, you will have the responsibility for interest charges. However, it will prevent you from letting go of a huge amount and shifting to making regular payments instead.

It allows you to keep cash at hand to keep other operations going and add a recurring outflow to your cash projection. Moreover, writing off the interest amount as a business expense will help you maintain the accounts well.

3. Looking for best prices

When looking for supplies, you must have the best quality at the best price. Every supplier will want business from you. However, you will only settle for the ones who can give you the best offer. It is important to look for the best deal, as it can save you lakhs of rupees. By reducing expenses, you significantly save money and can free up such cash for other outflows.

4. Have an assertive payroll policy

Paying people is not usually streamlined in a construction business. Most employees and labourers get paid daily, weekly, or bi-weekly. Some might even get paid per-project basis.

It is best to hire subcontractors and pay them every four weeks or monthly to manage such cash flow. You might not be able to do this with every project or every person, but it can yield you better results.

Streamlining such a process can help you hire full-time employees. It will assure them of having regular work, and expect a certain amount of money monthly. They will also dedicate their complete support to you and offer quality service. Such quality can reduce the chances of accidents, project setbacks and increase repeat business and referrals.

5. Hiring skilled project managers

As per average estimation, 85% of cash flow in construction businesses comes due to work-in-progress (WIP). Thus, the performance of cash flow majorly depends on the process laid down by a project manager.

It is extremely crucial to hire a skilled project manager and train them according to your business pattern. Moreover, make provision to give offers like incentive packages based on their cash flow performances. It will keep them on their toes and make them motivated to do more.

6. Handling order changes tactfully

Construction companies go through a lot of change orders, making the project more time-consuming. Thus, you end up spending more resources and money as well. For example, extreme weather conditions can bring in changes in orders.

Project managers need to process such changes quickly and effectively. It will help them make changes in their cash flow projection and find ways to create positive cash flow statements.

The equation and time and money significantly affect a construction business. Rather than spending more time and money to complete a project, you must invest your time in things that can materialise soon.

7. Create a streamlined payment structure

To have a streamlined cash flow statement, one needs to take a few measures to maintain their payment structures. Some tips to include are:
  1. Automating invoices and sending quickly to optimise quicker cash flow.
  2. Accepting electronic payment methods and keeping multiple payment options open.
  3. Avoiding both overbilling and under-billing, keeping all order changes in mind.
  4. Setting a day to expect payments for outstanding bills, which can be a 30, 60, or 90-day period.

Final thoughts

The reason why construction businesses are different is that their projects are not similar from one to another. So, creating sound cash flow strategies will help you. As mentioned earlier, qualified project managers are necessary to ensure such aspects are covered. They will assist you in making realistic cash flow projections, keeping order changes in mind.
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