Cash flow critical in commercial construction

A steady workflow in the commercial construction industry can be, at times, unpredictable.

Sales professionals and estimators may secure bids on projects that can keep a company busy for years, or the company might see a lull in business due to a slow economy. This uncertainty is why it is important for construction managers to carefully manage cash flow in business environments that see such ebb and flow.

Cash flow — money that moves in and out of your business — is the most essential component for any commercial construction project. The concept of positive cash flow is very simple: Cash coming in from clients should be more than cash going out for payments and expenses.

Being able to properly manage cash flow on projects can be the difference between success or failure for your projects and, by extension, your business. Knowing all projects are different, all contractors should take this subject seriously. Cash flow issues need to be immediately addressed and continuously monitored. If ignored, business owners can expect increased interest expenses, increased investment of owners’ capital, diminished credit ratings, an inability to take advantage of new opportunities and, ultimately, failure of the business. Therefore, compared to other industries, in commercial construction improving cash flow requires some different strategies.

Consider these tips to improve cash flow and help ensure your project remains profitable from start to finish.

Research your client. Only work with clients who can process your paperwork, sign off on completed work and pay promptly. Research your potential client by getting a financial statement or, at least, get references from contractors who have worked with the owner in the past. The goal is to make sure they have the financial capability, and disposition, to pay you on time for completed work.

Negotiate contract terms. Create and negotiate contracts that work best with your company’s needs, such as payment terms and schedule. Work with your subcontractors and vendors to schedule their payments from you after you receive payment for completed work, or try to time payments within a few days after expected receipts from your clients.

Aggressively collect payments. Try to get your accounts receivables down to 30 days or less. Stay organized, which allows you to distribute all necessary documents to the proper people. Doing so will help the payment process go more smoothly and avoid delays. Don’t delay asking for a payment on completed projects that have been inspected and approved.

Project future cash flow with a detailed budget. Create a reasonable cash flow forecast for your project. Think about how long your project will last, how much you will spend on the project, how much you will pay vendors and at what point they will get paid. It is key to understand how much cash you will have throughout the project. Use cash flow management software to compare your forecast to your actual disbursements and receipts so you can make better decisions in the future. Proper planning will help prevent payroll and payment problems.

Establish a line of credit with a bank. In emergency situations, having a line of credit allows you to be flexible while waiting for cash payments to be received. Keep in mind the goal is to help manage your cash flow, not go into more debt. This method should temporarily help you manage the day-to-day expenses of running your business.

Talk with a local lender to help establish an adequate credit line, and discuss other types of loan options. When choosing a banking relationship, make sure you select a lender with knowledge of the contractor’s cash flow cycle, and that they can demonstrate to you a great understanding of what it takes to be successful in commercial construction. Make sure they can personally identify the needs and best practices of the industry.

Proper cash flow planning will help you make intelligent decisions for your company regarding budgeting, financing, capital expenditures, compensation and growth. It is challenging, but managing positive cash flow is critical in order to be aware of potential problems and in order to achieve sustained success for your business.
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Editor’s note: Jason England is a commercial loan manager for Arvest Bank in Benton County. The opinions expressed are those of the author.