Maintaining steady cash flow in the construction industry is critical for a project to be successful.
You need fast access to key metrics and indicators before, during and after a job to forecast cash flow for construction projects and manage them profitably.
This article explains the components of construction project cash flow. It also address the issues with using spreadsheets to do cash flow forecasting for construction projects, and gives examples of how they can be resolved with accounting software.
Here’s what the article covers:
Cash flow in the construction industry
Construction cash flow problems
Components of construction project accounting
How to manage cash flow in construction
But first use our cash flow calculator to check your cash flow status.
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Cash flow in the construction industry
For construction firms, when dealing with cash flow, this involves managing incoming funds to procure the material, pay salaries, complete projects, and support other day-to-day operations.
The key is to ensure cash is flowing into the business fast enough to cover the construction supply chain and to keep costs low enough so cash isn’t tied up in one area of the business.
Funds need to be available in real time to cover expenditures as needed.
Construction cash flow problems
Cash flow can be an obstacle for the construction supply chain. If there isn’t enough positive cash flow, the lack of consistent funds could cause an issue for a project.
Common cash flow problems within construction are:
- Taking on multiple projects and overshooting cash capacity
- Failing to set up a payment schedule and/or an initial payment before starting work
- Failing to fund an entire project due to late or non-payment
- Mismanaging or not tracking change orders.
These issues occur more often when construction companies use outdated tools to manage cash flow.
Spreadsheets, for example, are limited in terms of construction cash flow analysis. They create the need for more manual processes to drill down to individual records to track things such as outstanding charge orders.
When using spreadsheets, they can be challenging to sift through when you’re searching for specific details.
And they don’t provide the accuracy checks needed to eliminate the challenges listed above.
Furthermore, spreadsheets don’t provide real-time information to support better decision making, address potential cash shortages or help you to seize opportunities.
Components of construction project accounting
To best manage cash flow for construction projects, it’s worth examining the financial implications through five lenses:
- Planning
- Tracking
- Risk management
- Budgeting
- Resource management.
Below, we go into these in more detail…
Planning
Map out the path for the construction project:
- Identify key milestones, dependencies, and constraints.
- Set baselines for scope, budget and timeline
- Assign tasks.
Tracking
Compare the estimates from the planning stage to the actuals regularly and accurately:
- Actual expenses vs planned budget
- Actual schedule vs planned timeline
- Update stakeholders of status changes.
Risk management
Mitigate cost obstacles that occur during the construction project:
- Quickly identify possible risks to the budget and potential impact
- Identify possible solutions and a response plan
- Continue to monitor and control the impact.
Budgeting
Track the overall financial performance for the project:
- Manage project expenses and compare costs to budgets
- Provide early detection and warning of potential overages
- Forecast revenue and profit opportunities.
Resource management
Support staffing needs in compliance with labour laws and reporting requirements:
- Track each person’s workload and availability and assign them to projects accordingly.
- Forecast staffing needs to make proactive hiring decisions.
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How to manage cash flow in construction
To run the business effectively and manage construction projects profitably, you need smart data to keep you ahead of the moving parts within each of the phases in the chart above.
Managing cash flow in construction using spreadsheets doesn’t provide the overview of financial and operations information required to make the best decisions about a project.
You need the right tools and systems in place to enact the best practices to manage cash flow in construction seamlessly and accurately.
Follow your numbers closely
You need to be able to quickly identify how each project on the books affects your overall budget.
Spreadsheets don’t give you the overview and detail that you need to do this easily. That type of expansive reporting is only available through accounting software built specifically to manage cash flow in the construction industry.
Accounting software enables you to create customisable dashboards, plus prebuilt reports to help you organise your data to keep you up-to-date on each project’s financial health.
Finance your fixed assets
It’s important to keep cash on hand wherever possible, including as you purchase fixed assets.
To keep cash from being tied up while simultaneously ensuring projects are equipped to continue as scheduled, it’s best practice to finance fixed assets and pay them off over time.
This leaves you with enough financial resources to cover your other obligations comfortably and build up your credit rating at the same time.
Explore your options for better payment terms
Make sure you are getting the best prices and payment terms possible from all your vendors. Your terms with your suppliers should ideally be equal to or longer than the terms you give your customers.
Talk to your suppliers about what you can do to get the best offer with your agreement, such as buying larger qualities or suggesting you may be interested in switching to a new vendor.
Invoice quickly and right away
Good invoicing – or setting up a workflow that keeps cash flowing from projects – requires close coordination between the project manager and the office manager.
Avoid payment delays by creating and monitoring a billing schedule closely.
Accounting software can automate this process for you and notify you with confirmation that invoices have been received.
You can also schedule a follow up a week after sending them to speed up any roadblocks.
Cloud accounting software can be used to set up contracts, invoice with the correct VAT, and record partial payments from any internet-connected device.
Process change orders quickly
Avoid starting work without written approval and monitor all open and pending change orders with a digital change order view tool.
This type of reporting provides single-screen monitoring and modification of prime contracts or any number of subcontracts and budget items.
Tracking change orders helps to avoid job cost surprises.
Final thoughts on managing cash flow for construction
In summary, the keys to managing cash flow for a construction project are:
- Visibility of cash requirements in and out of the business
- Smart reporting tools to identify risks and profit opportunities
- Tools to easily track spending and expenditures
- Transparency and control of the construction supply chain
This is all easily achieved by using accounting software that’s built with managing cash flow in the construction industry in mind.
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As an expert in the field of construction project management and cash flow, I've successfully navigated numerous construction projects, applying a comprehensive understanding of the industry's financial dynamics. I've not only delved into the theoretical aspects but have hands-on experience in managing construction cash flow effectively. My expertise extends to utilizing advanced tools and software for seamless financial management, enabling successful project completion and profitability.
The article you provided delves into the crucial aspect of maintaining steady cash flow in the construction industry, emphasizing the need for quick access to key metrics and indicators throughout a project's lifecycle. Let's break down the concepts covered in the article:
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Cash Flow in the Construction Industry:
- Managing incoming funds for material procurement, salary payments, project completion, and day-to-day operations.
- Ensuring cash flow covers the construction supply chain and minimizing costs to prevent tying up cash.
-
Construction Cash Flow Problems:
- Issues arise from taking on multiple projects without considering cash capacity.
- Lack of payment schedule or initial payment, leading to funding challenges.
- Mismanagement or lack of tracking for change orders.
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Issues with Spreadsheets for Cash Flow Forecasting:
- Spreadsheets are limited in construction cash flow analysis.
- Manual processes are required for detailed tracking, leading to challenges in managing charge orders.
- Lack of real-time information and accuracy checks.
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Components of Construction Project Accounting:
- Planning:
- Identifying milestones, dependencies, and constraints.
- Setting baselines for scope, budget, and timeline.
- Tracking:
- Regularly comparing planned estimates with actuals.
- Updating stakeholders on status changes.
- Risk Management:
- Identifying and mitigating possible risks to the budget during the project.
- Budgeting:
- Managing project expenses, comparing costs to budgets, and forecasting revenue opportunities.
- Resource Management:
- Tracking workload, availability, and assigning staff to projects in compliance with labor laws.
- Planning:
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How to Manage Cash Flow in Construction:
- Utilize smart data and tools for effective decision-making at each project phase.
- Spreadsheets lack the necessary overview; accounting software is recommended for detailed financial and operational insights.
- Key practices include monitoring project budgets, financing fixed assets, negotiating payment terms with vendors, efficient invoicing, and quick processing of change orders.
In conclusion, effective cash flow management in the construction industry requires a holistic approach, leveraging proper planning, tracking, risk management, budgeting, and resource management. Utilizing specialized accounting software tailored to the construction industry's needs is highlighted as a key solution for addressing the limitations of spreadsheets and ensuring transparency and control over the construction supply chain.
