It’s a new year, which means a fresh calendar year has arrived for construction businesses, offering both challenges and opportunities. Many factors will affect your company’s success this year — including inflation, the availability of labor and materials, and just how many projects you’re able to add to your backlog. Through it all, one thing that always matters is cash flow. 

Our construction CPAs highlight some ways to set the tone for maintaining strong cash flow throughout the year.

Use projections consistently

Many construction companies get into trouble because a sudden cash-flow slowdown catches them by surprise. To prevent this, perform regular cash-flow projections to stay informed of where you stand. Such projections can also enable you to pinpoint precisely which types of jobs best suit your business in terms of profitability.

Generating cash-flow projections involves looking at both the past and future. Examine your projects scheduled for the next year and outline when and how you’ll likely spend money. Bearing in mind that things could change, lay out expected monthly revenue for each job. Don’t overlook overhead and indirect costs (that is, costs that apply to more than one project).

In cases where you’re doing a job for a new owner or planning a project on spec, you may encounter difficulties predicting the timing. But you can use historical payment data to calculate an average for planning purposes. This same data, accumulated over time, also can give you an idea of how quickly certain owners pay their bills.

Always be mindful that, for construction businesses, working capital (a financial measure of liquidity) tends to ebb and flow based on the distinctive nature of the industry. You’re no doubt familiar with the situation: Your company generally doesn’t get paid until a job or job phase is completed, yet you still need to pay labor, equipment and materials costs currently. Construction working capital is the amount of money the company has to pay current bills and operational costs. On the bright side, assuming you’re a general contractor, you typically don’t need to pay subcontractors until your company collects from the owner.

Manage jobs for positive cash flow

There are many aspects of a project that can hurt your cash flow — or help it. Take change orders, for example. If you devise a better system for getting them approved, you’ll get paid more quickly for the additional work, bring in that revenue and thereby strengthen cash flow. Try to get a feel during contract negotiations as to how easily you’ll be able to work with owners on change orders if they arise.

There’s also the issue of billing. You obviously don’t want to underbill, which typically happens when miscalculations of the actual work costs are made, or there are unapproved change orders or project scope changes, as a few examples

However, when done judiciously and within the rules, overbilling (charging before a job or job phase is completed) can benefit cash flow. Doing so calls for a disciplined approach to completing work and strong cash management skills.

Above all, ensure your billing and collections procedures are as fast and efficient as possible. Establish strong follow-up procedures for handling slow payors and appropriately aggressive measures for collecting receivables.

Buy assets and materials carefully

Cash-flow surprises can often spring from a haphazard approach to asset management and materials purchases. When it comes to heavy equipment, contemplate the “buy vs. lease” conundrum carefully. It’s generally preferable to pay for assets you’re going to own for an extended period over that very period and save your cash for other, more immediate purposes. Leasing may offer lower payments and less risk in terms of obsolescence. 

Also keep an eye on inventory. Keeping materials on hand may keep jobs running smoothly, but buying too much can weaken cash flow, and you’ve got to be able to store it safely. Plan orders so you can keep just enough inventory without jeopardizing project timeliness.

Recognize the risk

Cash-flow trouble is an equal opportunity threat. It can seriously endanger a struggling construction business, but even a successful one can face major risk if it overcommits to projects without the liquidity to support them. Our dedicated industry pros within our Construction & Real Estate Group can help you build the framework to support your financial success this year. Contact us today, we know the way.