Cash flow is one of many unexpected construction accounting challenges in a growing market. As more business and projects flow in, your cash flow can become tight as you extend more of it to service these new customers. Doeren Mayhew’s Houston construction CPA Mike Kuchar and business advisor Jennifer Mailhes, CPA, discussed top cash-flow management strategies to help free up cash and shorten your cash cycle during a recent luncheon for the Houston chapter of the American Subcontractors Association.

  1. Benchmark your financial statements. Knowing company ratios can help you to set goals, identify opportunities and understand triggers to internal changes. The following formulas can help you calculate liquidity and efficiency ratios:construction accounting - cash flow - liquidity ratios
  2. Get to know your client. Learn all you can about the potential client and the type of reputation they have. Are they slow or late with payments? Knowing this allows you to determine if it is really worth allocating your time and resources to the project. Once the contract is awarded, try to negotiate payment contract terms and implement a payment schedule. (And for help securing the contract and maximize profits on it, see our bidding best practices.)
  3. Look at your contract specifics early on. Establish and understand the terms of the contract, including retainage, payments for stored materials, insurance and other key provisions. Understanding contract specifics can help in controlling job costs and organizing a cash management system.
  4. Develop a credit policy. Check credit and know how much you are willing to extend. Track and work with your slower-paying customers in order to avoid cash-flow challenges.
  5. Consider requiring a deposit or requiring accelerated payment. This especially applies to custom projects, since they typically have more unknowns and require more time and resources.
  6. Create a cash management system. Instead of just reacting to difficult or costly situations, take time to plan and understand your options. Consider what factors affect your income and cash flow. Budgeting your income and scheduling known future costs allows you to anticipate changes and provides time to plan for those periods when cash flow will be tight.
  7. Book in real-time. Track your cash flow directly in your accounting system as opposed to working in a spreadsheet and transferring changes over at a later time. This keeps accounts and balances current and helps avoid surprises.
  8. Work with your vendors. If possible, stagger payment dates to avoid payables due at the same time. Also, make sure to take advantage of discounts or early payment incentives when you can in order to save.
  9. Manage change orders. Change-order work can be difficult, and if not managed properly, can result in a negative cash flow. Complete and report the work in a timely manner and make sure to keep the proper documents in order to avoid paying out of pocket for unreported costs.
  10. Understand your overbillings. Try to frontload your jobs as much as possible in order to be overbilled whenever possible. While it’s no secret that overbillings can improve your cash flow,overbilling your customer too much could cause a delay in payment.
  11. Send invoices promptly. Instead of waiting to bill for change orders or other bills during a regular billing routine, send out invoices upon project completion in order to get your money coming in sooner.
  12. Make billing simple. Touch base with your client in order to make sure you are sending to the right person and including all the information they need. Cut back your mailing costs and eliminate the delivery time by sending invoices via email. Also, remember to follow up and make sure the invoice was received.

Doeren Mayhew’s specialized group of construction CPAs can help you better manage your cash flow and plan for future growth. Contact our Houston construction accounting specialists for more information on our services.