Cash flow in business usually refers to the money that comes in (income) and out (expenditure) of the company’s accounts. Firms with more income than expenditures have positive cash flows, while those with less income than expenditure have negative cash flows.
However, cash flow in the construction industry works differently.
In this blog, we’ll explain construction cash flow, why it’s important, the common cash flow problems in construction, and how to effectively manage your cash flow. Read on to find out more!
What is construction cash flow, and why is it important?
Cash flow in construction typically refers to the analysis of when costs will be incurred and how much those costs will be over the duration of a project.
Why should you do this as a contractor or subcontractor in the construction industry?
Understanding your cash flow as a construction business is crucial because it means you will have the right level of funding in place to deliver and complete the project. By analysing your costs, you can appropriately budget and pay for materials and labour throughout the project.
Analysing your business’s cash flow also helps you make better financial decisions, identify and manage shortfalls, and stick to your budget so your business can stay afloat.
To accurately determine your cash flow throughout a project, you need a payment scheme or table (such as the one below), which will be drawn up and agreed upon with the client or quantity surveyor.
| Milestone Number | Milestone Description | Milestone Assessment Criteria | Milestone Value £ | Cumulative Value £ |
| M1 | Start on site | Occupying Site | 550,000 | 550,000 |
| M2 | Set up on site | Complete site set up | 521,000 | 1,071,000 |
| M3 | Pad foundations | Pad founds (Bldg 23) substantially complete to grid A | 34,000 | 1,105,000 |
| M4 | … |
Common construction cash flow problems
It’s not uncommon for construction contractors and subcontractors to encounter cash flow problems. After all, there are a lot of complexities within the supply chain, and it only takes one delayed payment to impact the whole project or business.
Here are some of the most common construction cash flow problems:
- Delayed payments – When a client’s payment is delayed, it can affect your cash flow and have a knock-on effect on your project’s timeline.
- Slow invoicing – If your invoices are late, you will slow down the process of receiving payment, so the sooner you invoice for your work, the better.
- High upfront costs – Covering the cost of materials, equipment, and labour upfront can significantly impact your business’s cash flow, as high costs can put a strain on your cash reserves.
- Cost overruns – Unexpected expenses or project changes often cause cost overruns, which can impact cash flow and budget.
- Paying your bills too early – Paying bills too early can cause cash flow problems. If you pay your bills before you’ve invoiced a client, you could experience a cash shortfall.
- Poor financial planning – When you don’t correctly plan your cash flow forecasts or budgets, you can encounter liquidity problems and financial instability.
- Seasonal fluctuations – The construction industry often has peak and off-peak periods, so it’s important to take this into account when analysing cash flow and determining your off-peak and lower revenue months.
6 tips on how to manage your cash flow
It’s paramount to manage your cash flow, and the good news is that it doesn’t have to be an impossible task. Follow our six tips on managing cash flow to enjoy a healthier, happier business.
- Create a plan
The first thing you need to do is create a long-term plan (between 3 and 5 years) that outlines the direction, ambitions, and targets you want to set and achieve for your construction business.
Within this plan, you also need to include cash flow forecasting for any current projects to identify potential cash flow problems, understand your cash needs, and determine the best financial decisions for your billing, expenses, and business.
- Review your payment terms
To ensure you manage your cash flow effectively, you also need to review your payment terms. The clearer and more realistic your payment terms, the less likely you are to experience cash flow problems.
This step may involve updating your payment terms to clearly state how long a client has to pay, negotiating better payment terms or discussing potential supplier offers or discounts.
- Invoice quickly and ensure an efficient billing process
Having an efficient billing and invoicing system is a must if you want to improve your cash flow, as this ensures you receive timely payments.
Using accounting software, relying on automatic invoicing systems, or scheduling follow-up invoices/emails can all help improve your billing process and prevent late payments.
- Monitor expenses
Prevent overruns by regularly monitoring expenses. When monitoring your expenses, make sure you track them in real time, compare actual costs to the budget, and identify areas for cost reduction.
- Manage project timelines
Efficiently managing the project timeline can also help improve cash flow. By keeping detailed project plans with timelines, providing regular progress updates, monitoring site progress, and actively seeking actions to fix any issues, you can help minimise payment delays and meet each stage of the project.
- Seek professional advice
Getting your cash flow right is detrimental to your business’s success. That’s why if you’re new to construction or simply don’t have the know-how or time to manage your cash flow effectively, you should seek professional advice and support.
Need help?
At Nexus Consult, we’ve helped a range of subcontractors plan their cash flow management and implement effective processes to ensure better cash flow and improve their businesses’ longevity.
We address their financial uncertainty by offering practical tools like revenue trackers. These tools provide a 3-month financial forecast, comparing planned and actual revenue, overheads, and cost of sales. This tool means we know at any time what the revenue is for that month, what the net profit is for that month and what this looks like for the year ahead, giving subcontractors the confidence to plan for the future.
If you want cash flow forecasting tips or to learn how to manage your cash flow more efficiently, our team of experts can help. Contact us now to ensure your construction projects keep running smoothly.
