Effective cash flow management in construction relies on clarity on contract terms, efficient invoicing, incentivizing early payments, and closely monitoring expenses. But more often than not, projects can go over budget and face costly delays.
Keeping watch of your cash flow requires more than just a construction management software solution; it relies on the democratization of data and analysis that can help inform decision-makers when it comes to accurate billing and real-time tracking.
Amazingly, a 2023 analysis of more than 16,000 major construction projects across over 20 different fields in 136 countries over the past 100 years found that an astonishing 91.5% of projects went over budget, over schedule, or both.
Additionally, less than 1% of projects were found to have been completed on time and on schedule while actually delivering the promised benefits to clients.
This severe misalignment between projections and reality calls for a more unified approach to project management and construction cash flow.
Here are five key strategies that firms can adopt to boost their chances of staying liquid and profitable:
1. Effective Cash Flow Forecasting
Cash flow forecasting is a crucial consideration for any construction business that aims to maintain financial stability.
As standard practice, you should outline all anticipated cash inflows and outflows for each month of a project within your forecast. Key areas of focus here should include customer payments, payments made to suppliers and subcontractors, salaries, and all miscellaneous costs.
Project changes in terms of scheduling or costs should be reflected in timely forecast updates, helping you to quickly communicate the impact of any hurdles to all stakeholders.
Cash flow projections can help construction firms to prepare for possible liquidity issues and take proactive steps to address them. This analytical approach to managing your profitability can also help to find extra revenue that can be put back into your company or to settle debts quicker.
2. Embrace Automation
Because financials within the construction industry require high quantities of manual management, there’s an increased risk that projects are vulnerable to human error - leading to failures in cash flow oversight.
Utilizing an automated platform to optimize cash flow means your business can benefit from centralized financial data and project documentation, helping to track spending, eliminate paperwork, and leverage faster action from decision-makers.
With the help of construction cash flow and financial management software, decision-makers can turn to real-time, customizable financial reports at project and board-level while eliminating the need for multiple software solutions for project and budget management.
This software can also assist in forecasting accurate outgoings with integrations into payroll, supply chain, subcontractor management, and field service management modules, helping to leverage a more unified service and a holistic cash flow overview throughout the company.
3. Mobile Technology to Scrutinize Spending
The best way to maintain a proactive approach to controlling your cash flow is to track expenses across a project in real-time. This allows construction accountants to compare actual costs to the budget and identify areas to focus on for cost reduction.
While this can feel like a plate-spinning act, there is a growing range of mobile apps that can help track costs from the field and across project teams. Real-time cost data can be collected on-the-go - all of which can be integrated into project management platforms to offer a more holistic overview of cash flow.
4. Automate Invoicing
Manual invoicing can be problematic when it comes to accurately managing your cash flow. Human errors and delays in processing and sending out invoices can harm your liquidity and profitability upon the completion of construction projects.
While you can write up your invoices by hand, it’s more effective to use software to automate the process for a frictionless experience.
By scheduling your invoices to be sent ahead of time, you can not only maximize your cash flow potential but could even add early payment incentives in the form of a discount on future projects or other freebies.
5. Audit Project Timelines
Keeping your projects on schedule is essential in cash flow management. By adding greater detail to your project plans with clear timelines and regular progress audits, it’s possible to adopt a more proactive approach to correcting inefficiencies long before they can become costly delays.
Your project timelines should be audited every time new information is added to check for any mitigating circumstances that could affect profitability. Any changes should also be shared throughout the project’s stakeholders as a means of keeping all parties informed of alterations in good time.
Keeping on Top of Cash Flow
Every step of the construction lifecycle holds cash flow considerations that arrive from all angles. With so much money moving in and out of your business, gaining a holistic overview of your balance sheets and future changes is imperative.
By using the right blend of automation technology and due diligence, your construction business can benefit from a clearer understanding of your liquidity and profitability. In an industry where budget issues and delays are a constant part of life, knowing your financial standing is crucial for creating a sustainable construction operation that can continue to grow long into the future.
