Cash Flow Management in Residential Construction: 5 Tips That Work
Identifying Cash Flow Problems
Effectively managing the flow of cash in and out of your accounts on a per-project and annual basis can make the difference between success and failure for your business. When you have more money than liabilities, you have positive cash flow. You can cover your bills and keep your business operating. When your current obligations exceed your cash, you have negative cash flow and this threatens your business operations. If negative cash flow isn’t turned around, the business can struggle financially and even go under.
Several financial reports can give you insights into your company’s cash flow health. A cash flow report shows how much money you actually have on hand at certain points in time, by comparing the amounts and timing of your accounts receivable and accounts payable. Your accounts receivable aging report is important because it can show you how your billing and collection practices are impacting your cash flow, and these practices often lie at the heart of cash flow problems.
Common Reasons for Cash Flow Issues
Builders, trades and suppliers are tied closely together financially during a residential construction project. They depend heavily on each other for the successful completion of the project. Once products and services are delivered, it’s important for payments to flow smoothly.
Unfortunately, managing cash flow is particularly difficult in the residential construction industry. Some industry-specific causes of negative cash flow are:
- The high cost of starting a new project and the necessity of floating the costs of deposits, supplies, labor, etc.
- The prevalence of change orders, and the unpredictability they create
- Delayed closeouts, when last-minute problems turn projects into money pits
- The common practice of retainage, which delays payments and often pushes contractors into temporary cash deficits
These issues are probably here to stay. However, this doesn’t mean positive cash flow is out of reach of home builders and suppliers. The most important reasons for poor cash flow are the same in virtually every industry — billing inconsistencies and collection issues — and these can be improved, especially by getting builders and suppliers on the same page.
5 Effective Tips for Construction Cash Flow Management
Use Cash Flow Projections to Plan
It’s important to regularly make cash flow predictions and base business decisions on the information. In construction, no two projects are the same, making forecasts much more complicated, but they are invaluable. They can help you plan for upcoming project expenses and recognize and respond to problems before your bottom line suffers.
Automate Invoicing and Payments
Automation can improve the payment process between builders and suppliers.
If you are a trade or supplier who wants to get paid promptly, the first step is getting those invoices out there. Use a system that makes it easy to submit all invoices automatically, with necessary documentation, to the correct recipients, within 48 hours. Get confirmation that invoices have been received and follow up if necessary. Once payments are made, your system should reconcile your accounts and update your AR status records.
If you are a builder, automation can help you avoid hours (or days) of verifying invoice data by tracking down paper documents in a filing room. In fact, accounts payable automation can reduce invoice processing time by over 80%. This enables you to send payments more quickly, reconcile payments more easily, take advantage of quick-pay discounts and increase supplier satisfaction.
Enable Electronic Payments
A system that gives suppliers a choice among multiple payment options can also speed up the process. Convenient electronic payment options are easier for builders to access, encouraging faster payment, and these near-real-time transactions bring funds into the hands of trades and suppliers more quickly. With checks being the primary target of fraud attacks on most companies, electronic options are also more secure and reliable.
Build Company-Specific Cash Flow Practices
No two residential construction companies operate exactly the same way and your cash flow practices should fit as seamlessly as possible with your work process. They should be easy for your staff to implement and create a positive experience for all payers and payees alike. When vendors and suppliers are paid quickly, they are better able to grow their capabilities and serve their builders more effectively.
When builders and suppliers gain visibility into payment records through a shared payment solution, there are fewer opportunities for problems related to fraud or human error. There are also more opportunities to correct any remaining issues early, before they can significantly delay the payment process and potentially the project. When everyone is working with the same information, communication can be easier and more effective.
How Technology Can Help
Cash management software designed specifically for residential construction companies can make improving your cash flow much easier. Because of the industry’s unique challenges, generic cash flow modeling software isn’t enough. It can’t handle the non-standard nature of residential construction projects or the frequency of changes during the process.
However, dedicated software for your industry can:
- Automate invoicing and payments;
- Integrate account payable tasks into one centralized payment process;
- Connect builders, trades and suppliers with real-time messaging and transparency;
- Provide visibility into check records, payments, invoices and expenses;
- Enable a variety of payment methods;
- Help prevent fraud; and
- Generate cash flow forecasts and other reports automatically;
… all while saving your office time and money.
Sticking with legacy construction invoice and payment systems can block your business from seizing growth opportunities. Hyphen Wallet provides an advanced construction invoice and payment solution for builders, trades and suppliers that reduces costly and time-consuming processes, improves reconciliation of accounts, increases security and minimizes mistakes. Learn more today.