Any construction business owner will tell you that cash flow management can be a real headache. It can get complicated and can be a real nightmare tracking multiple jobs that all need funds at different times. Cash flow is the lifeblood keeping your jobs moving forward, paying for materials and workers, or financing the next job and problems resulting from poor cash flow management can snowball fast if you are not paying attention. Increases in material costs, delayed payments from customers, or unexpected expenses can leave you without the resources to keep your business moving. The good news is cash flow management doesn’t have to be tedious or difficult. In this article, we are going to take you through 8 tips to manage cash flow like a pro!
1. Forecast Your Cash Flow
Start by predicting your cash inflows and outflows for the next couple of months. Use a google sheet or spreadsheet to keep everything organized. Start by listing all your expected expenses like material purchases, labor costs, finance payments, overhead, etc under the month you will make those payments and purchases. If you use credit accounts to purchase materials, then list those expenditures under the month you will make payment and not the month purchased. Next add incoming customer payments, and any other cash influxes under the month you expect to receive those payments. Accurate forecasting allows you to anticipate shortfalls or surpluses so you can plan accordingly. Continue to update your forecast as things change.
2. Maintain a Reserve Fund
Having a cash reserve is like having a financial safety net for when business slows down or you run into unforeseen issues. Cash reserves are not to be confused with having a line of credit. While both are able to provide much needed funds when the unexpected occurs, credit carries a hefty interest component that will cost you more in the end. Those interest payments can add up and slowly drain your business. You should endeavor to have three to six months' worth of operating expenses in reserve. A reserve can reduce the impact of unexpected expenses or delays in payments without disrupting your whole business.
3. Invoice Promptly and Follow Up
Tracking money coming in is as important as money going out and an easy way to ensure money is coming in is to invoice your customers. It’s good practice to invoice clients as soon as a milestone is reached or a job is completed. Don’t feel bad about following up on overdue invoices, you had an agreement and deserve payment. The sooner and more often you get paid, the better your cash flow will be.
Consider setting up a payment schedule for progress-based milestones like material purchasing and work phases. Waiting until the end of the job to collect payment can often put your business in a tight spot having to finance the entire job up front. Break down the project into smaller milestones and invoice for each completed phase. This ensures a steady stream of income throughout the project and reduces the risk of non-payment at the end.
4. Offer Early Payment Discounts
Encourage clients to pay early by offering a small discount for early payments. For example, a 2% discount for payments made within 10 days can incentivize clients to settle their bills quickly. This strategy can significantly improve your cash flow and reduce the time spent chasing payments. You can include that 2% in your pricing so that the discount has no impact on your margins. A discount is a stronger motivator than a late penalty and encourages your customers to make prompt payments, maintaining healthy cash flow for your business.
5. Negotiate Better Payment Terms with Suppliers
Building strong relationships with your suppliers can help you negotiate better payment terms. The easiest way to build these relationships is to use a few preferred suppliers and pay your bills on time. Doing more business with the same suppliers benefits both of you and strengthens your business relationship. When you have a solid reputation with your suppliers, they are more willing to discuss discounts or longer credit terms. Ask for extended payment terms that align with your cash inflows. This way, you’ll have more time to receive payments from clients before you need to pay your suppliers.
6. Monitor Your Expenses Closely
Not having a handle on your spending can quickly lead to negative cash flows. If you don’t know how much you’re spending or when those bills will come due, how can you forecast your cash flow? You need to have accurate material costs to make sure that your pricing is covering costs and generating enough profit. You need to be aware when you have unexpected material costs so you can avoid underestimating materials in the future. Tracking your spending provides real time information and insight into the progress of the job and the state of your business. It can be a pain to track all your purchases and many of us wait till the end of the job to run our numbers, but at that point it’s already too late to do anything about it.
Keep a close eye on your expenses to ensure you’re not overspending. Use expense tracking software like OnTraq, and accounting software like QuickBooks to track every penny and categorize expenses. Regularly review your budget and compare it to your actual spending. Identifying and addressing discrepancies early can prevent cash flow issues down the line.
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7. Plan for Seasonal Fluctuations
Construction work often varies with the seasons. If you run a roofing company in Michigan, business during the winter months is going to be slower or nonexistent. Plan for these fluctuations by saving more during busy periods to cover the slower months. This goes hand in hand with having a healthy reserve. Having funds available during a slow period or off season can mean the difference between your business going under or not. This proactive approach helps you maintain a stable cash flow throughout the year.
8. Regularly Review and Adjust Your Cash Flow Strategy
Cash flow management is not a set-it-and-forget-it task. You should regularly review your cash flow strategy and adjust it as you get more information. Update your forecast with real numbers and compare with your estimates to improve your forecast. Stay informed about industry trends, economic changes, and internal factors that could impact your cash flow. Being proactive and adaptable is key to long-term financial stability.
Managing your business’ cash flow is critical for the financial health of your business. Overspending and poor planning can result in negative cash flow and an inability to meet your obligations or even fund the next job. Your reputation and your business can suffer as a result. Understanding your numbers and having a good cash flow forecast gives you the information you need to make decisions and ensure you are positioned for success. OnTraq AI automates all your cost tracking so you don’t have to spend valuable time typing in receipts and staring at spreadsheets. It’s as easy as snapping a photo of the receipt or uploading an invoice and the system will pull the information and organize everything against your budget. It also handles time tracking, making payroll and labor management a breeze. The best part is OnTraq seamlessly integrates with QuickBooks accounting software to make your life easier. Check out OnTraq today to start taking back your time and nailing your numbers.
