Common Problems and Solutions: Managing Cash Flow in Construction
Cash flow is a pain point in the construction industry. The construction industry is riddled with late, slow, or partial payments for services rendered.
Without taking steps to prevent cash flow issues, construction companies can easily find themselves in a bad position. That's why it's important for construction companies to understand methods to mitigate cash flow problems and build better business practices to ensure healthier cash flow.
Common Construction Company Issues That Drain Positive Cash Flow
The construction industry faces unique challenges when it comes to cash flow in their business.
Some of the common reasons construction companies have issues with positive cash flow can be:
* High payrolls. Businesses must always prioritize employee payments above all else. Many employed by construction companies have high hourly rates, especially if they are working overtime or on holidays to complete a project.
* Not budgeting for retainage. Retainage refers to withholding money until the end of a project to ensure that the project is completed. Funds held for retainage typically account for 5-10% of a commercial project.
* Slow or late payments from customers. If your customers are slow to pay, or often pay past deadlines, it will damage your cash flow. Late fees can eat away at your budget as well.
* Slow invoicing practices. Customers can't pay until they receive an invoice. Being slow to invoice customers can cost you in the long run.
* And more!
Cash Flow Management
To avoid cash flow issues, all construction companies should understand cash flow management. Cash
flow management involves analyzing expenses and revenue. By analyzing current cash flow reports for
your construction business, one can make accurate predictions for cash flow in the future, leading to
better business decisions about how to allocate funds
As an example, if a company knows they are receiving a payment of $200,000 in the upcoming week, they can make financial decisions in the present that account for that flow of money. Conversely, if a company knows an expected payment will be tied up or delayed, it can tighten up its spending to compensate for that missing money.
By closely analyzing the cash flow and predicting future cash flow, businesses can make smarter financial decisions.
Tips to Better Manage Cash Flow in the Construction Industry
Though some common cash flow problems are unavoidable, a construction company can greatly
improve its cash flow by improving its financial management practices.
Utilize Your Companies Right to a Mechanics Lien
A mechanics lien is a powerful tool to combat nonpayment. Mechanics liens protect your business
against the peril of nonpayment and ensure you will be paid for work completed. Each state has different
mechanics lien stipulations, so it's important you are on top of deadlines associated with filing a claim.
Finance Asset Purchases
It may seem smart to purchase upfront with available cash, but the opposite is true. Financing an asset
allows more liquidity in your pocket. Financing an asset will also boost your credit rating if payments are
made on time.
Negotiate Better Payment Terms
You have the right, and responsibility, to negotiate the best contract terms. You could negotiate clauses
like a pay‐if‐paid clause or additional terms that allow access to retainage funds more quickly.
Negotiating the best terms for your company will protect your business and cash flow.
Although it's true that construction companies face unique challenges when it comes to cash flow, there
are numerous ways to increase cash flow and decrease unsustainable business practices. By learning
methods to better manage your cash flow, you can create a more reliable income for your business to
Nationwide Notice, Inc. can partner with construction companies of all sizes, and strive to work with your contractors and sub-contractors by using existing lien laws as leverage to ensure payment, as well as secure their lien rights to get the money they deserve. The experienced staff at Nationwide Notice, Inc. will assist you in submitting and tracking the correct legal documents required by your state to protect your lien rights which is a valuable tool that aids with your receivables. You can learn more about all the services we provide on this page or find out more about what makes us different here.