Cash flow in the construction industry is one of the most important aspects of any business, but it can be especially challenging for businesses in this industry. This is because construction projects tend to be unpredictable and have a lot of moving parts.
There are a number of things you can do to better manage your cash flow and this article will discuss some of them. Additionally, we will explore how working with an external accountant can help you overcome some of the unique challenges that you may face along the way.
We understand that you need quick access to reports and forecasts, so being equipped to manage your money efficiently is crucial.
Common Obstacles
The nature of the construction industry poses a number of cash flow-related challenges. The first of these, is that projects can be unpredictable and cash flows often have to be spread over multiple sites, subcontractors, suppliers and project milestones.
It’s also important to track cash outflows accurately so you don’t overspend on any particular project. This is why having a sustainable and manageable strategy in place is key. It can make your life so much easier as well as ensure your projects are carried out as efficiently as possible with no mistakes.
Having an unskilled person in charge of cash flow or without understanding the process in which it can be managed can lead to overspending or mismatching budgets and actual spend that can become costly to the business.
Additionally, cash flow can be affected by many external factors, such as prevailing market conditions or seasonal changes. In such a diverse and technical industry, it is the fine detail that really matters but the barriers can often be more prominent than in other areas of business.
Tips for Managing Cash Flow in the Construction Industry
#1 Have a cash flow plan:
This helps you anticipate cash inflows and outflows and prepare for future cash needs. It should include an analysis of past cash flow patterns, market trends and cash reserves. This plan should be managed by an accountant so they can track performance and identify any cash flow problems before they arise.
An external source will have the unique skill set and eye to determine where issues may crop up and also to develop a wider strategy. You may think it is cheaper to manage on your own, but there is always a possibility it could jeopardise your business in the long run from overspending and incorrect budgeting.
It can also be hard to know where to start with a plan or strategy. We have seen so many in place and been at the forefront of creating them that we could point you in the best direction for your business. Don’t try to tackle it alone.
#2 Track cash flows:
The best way to track cash flow in the construction industry is via a statement. This should be done on a regular basis and should include outflows such as payments to suppliers, subcontractors, employees or creditors and cash inflows from customers or loans. Ensuring that you do this is vital when staying on track and on top of cash flows.
#3 Work collaboratively
Having a plan that works for all parties involved and can be agreed upon in real time is likely to mitigate a lot of the issues you expect to see along the way.
Work collaboratively with your contractors, suppliers, and other stakeholders to agree on cash flow deadlines. You should always be in the habit of asking for a cash flow forecast from subcontractors before agreeing to any contracts or additional resources.
Moreover, setting up milestones and payment terms that are agreed upon by all parties involved as this will ensure cash is always flowing correctly and help you budget each project more effectively.
Communication is at the heart of every project. The same should go for cash flow in the construction industry – it is always hard to tackle the issues when you’ve got a crossover of different messages or too many people trying to manage one situation. By being clear, open and transparent with those you work with, you can help avoid any misunderstandings that may arise due to miscommunication.
#4 External checks for potential clients
Consider utilising the services of an external credit agency to dig deeper into the financial position of any clients you may work with down the line.
This will help you to avoid circumstances where you have planned for and agreed on one thing, but sudden requests or changes throw a spanner in the works. It also covers you for any liability and regulations that may compromise your projects.
Also, an external body like ourselves here at Calathea Accounting can help you to keep an eye out for and chase late payments. It throws a major spanner in the works when you are delayed for any reason, but knowing how to tackle and manage this is essential in making it as easy as possible for you.
That’s where we come in.
#5 Stay on top of accounting & industry changes
It may seem like an expensive overhead to employ an external accountant, but the cash flow benefits can be huge.
We will help you keep track of cash flows more accurately and efficiently, as well as assist with identifying any cash flow problems before they arise. We will also keep you updated on any cash flow or accounting changes that may impact your industry, as well as help you to stay compliant with the relevant regulations.
We don’t expect you to know everything – that’s our job! So getting in touch today will allow you to focus on the parts of your business that you specialise in and let us worry about the rest.
#6 Negotiate favourable terms
Working with subcontractors and suppliers can highlight some issues with cash flow in the construction industry, so it’s important to negotiate favourable payment terms. This will help you manage cash flow better, as well as build relationships that can last for years to come.
You should also look at ways of negotiating discounts or extended payment periods from your suppliers. This could help you to manage cash flow better and reduce the amount of cash that needs to be on hand at any given time.
Finally, don’t forget to explore financing options such as lines of credit or invoice finance, which can help provide cash when needed and bridge cash flow gaps.
Benefits of hiring an accountant for construction
By hiring an accountant to manage cash flow in the construction industry, you can be sure that it is being managed correctly and efficiently. An accountant will help reduce costs and identify cash flow problems before they arise. They’ll also be able to advise on cash reserves, forecast cashflows and even negotiate favourable payment terms with suppliers.
Financial management will ultimately be improved as all finances will be being tracked more effectively and more efficiently. In turn, this should free up your time to focus on other important aspects of the construction business now that you know all finances are being handled correctly by a professional.
Mistakes in finance can be costly, an accountant will help you avoid costly errors by ensuring that your financial records are accurate and up to date. By utilising their expert advice, accounts are able to provide valuable information and guidance on how to structure your business to minimise financial errors and how to protect your assets.
When cash flow is managed correctly, it can lead to greater profits as well as a better cash position thus allowing the business to manage cash flow in a more efficient manner.
At Calathea Accounting, we specialise in construction businesses and are well versed in all of the specialities and unique approaches it takes to effectively manage cash flow. We can provide cash flow management solutions tailored to the specific needs of construction businesses, helping them save money and increase cash flow. Give us a call today to find out how we can help you.
In Conclusion
Overall, cash flow is one of the most important aspects of any business, but especially in the construction industry where cash flows are even more unpredictable.
You need clarity and certainty when it comes to running the finance function within your construction business – we offer a personalised approach to looking after your accounts and ensuring that your construction business is profitable.
By following the tips above and hiring an accountant to manage cash flow, you can be sure that cash flows are being managed effectively and efficiently. This will allow the business to have a better cash position and profit, as well as reduce costs in the long run. So don’t hesitate – contact us today to get started.
If you want more information on finding the best accountant for your construction business – you can check out our other blog. We will be able to provide more detailed advice on cash flow management and how an accountant can help.
