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Posted on April 14, 2022 at 4:00 PM
Written by Plumb
We hear this question a lot.
The good news is that managing the cash flow on a construction project doesn’t have to be difficult. The unwelcome news is that if you don’t manage your construction cash flow, it can impact not only your current job, but future projects as well. If you want to ensure viable profit margins, you need to stay on top of your cash flow.
First, let’s clearly define what we mean by cash flow. On a construction project, it’s a simple definition: cash flow is the art (or science?) of making sure you are using the customers money – and not your own - to build their project.
The best – and simplest way – to ensure you are doing this is to bill your customer timely and accurately. But how else can you manage cash flow? Here are some other tips of the trade about various factors affecting the cash flow of your construction job.
In other words, put your biggest project costs at the beginning of the project. You’ll receive your customers money earlier and can continue to use it to pay for the rest of the job. This way you are not digging into your own pockets to cover expenses.
This is an immensely helpful cash flow tool. When you negotiate this type of agreement, you are not spending money you don’t have to pay vendors, subcontractors, or anyone else you might owe money. Instead, you get cash in so you can send cash out.
It’s a simple statement, and might go without saying, but if you don’t understand your budget, if you haven’t created an accurate budget, and if you aren’t using your budget to track against actual expenses, it will be exceedingly difficult to manage your cash flow.
There are some incredibly useful cash flow reports within select construction software tools. You should make use of these reports – but understand that these reports are only as good as the data added to them. We can’t emphasize this enough – it is well worth the time spent at the start of a project to make sure that all of your budget data is entered accurately into your software tool.
It’s easy to get excited when a big check comes in, but chances are that check will be needed to pay for other job-related expenses. Make sure you know how much of your incoming payments will need to be paid to vendors or subcontractors.
Another question we often hear is: “What might happen if you don’t manage your cash flow?”
Most likely you’ll need to use credit to build a project, which will end up being more expensive due to the interest you’ll owe. In addition, if you don’t have the funds to cover your costs, you can end up having bonding issues. If you aren’t bonded, it will be extremely difficult to get future projects. To sum it up, you need good cash flow to be solvent, to get bonded, and to continue to win future jobs.
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