Forming an adequate cash flow is a sophisticated procedure for any organization, especially in the construction business, where client payments are often received slowly, with a delay, and not in full.
Levelset questioned representatives from 519 US construction firms to determine the industry’s cash flow trend in 2022. The study showed 9 out of 10 construction companies indicate in the contract the settlement period for financial obligations of at most 30 days, but only 4 out of 10 firms receive payment on time.
Successful management involves using reliable financial records, creating forecasts for different periods, and studying sources of income and expenses from the first to the last minute of the construction program. Some business owners carry out construction bookkeeping independently, but we recommend that you seek the help of professionals.
What is cash flow?
Cash flow is one of the basic accounting concepts. It is a sum of cash and cash equivalent, which an organization gets or gives back to creditors. If the calculations show that the company has a positive cash flow, meaning revenue is more than obligations and it can deal with all debts and make a profit.
Companies with negative cash flow lack the funds to pay off all creditors. Cash flow with a minus sign means that the company has chosen an inefficient financial strategy, and if it is not changed as soon as possible, this can lead to bankruptcy.
What difficulties with cash flow may arise in the construction industry?
Many construction projects have a multi-stage payment system, and the money only sometimes reaches the accounts on time, leading to difficulties in cash flow. Let’s discuss what financial problems you can expect in the construction area:
- Late billing: remember to send all billing documents to clients to get funding from them as soon as possible.
- Fast settlement of obligations: paying all bills before you inform customers about them can cause a cash shortage. Companies accustomed to quick payments with suppliers often face unstable financial situations.
- Poor inventory management: some contractors buy large quantities of consumables to keep in warehouses. However, this may cause funds frozen in reserves to become less liquid. The company will have to look for other sources of funding to carry out current operations. Please carefully calculate the needs of each project and keep a record of all stock reserves.
Construction bookkeeping professionals will advise construction business owners on how to set optimal payment terms and develop a contingency plan to avoid loss of financial resources.
The main aspects of organizing an adequate cash flow
Like many other entrepreneurs, perhaps you think that accounting services are only needed when creating a balance sheet, income statement, and other financial documents. In reality, construction bookkeeping experts know how to make your business as profitable as possible and help reduce your costs. Optimizing the procurement process and other expenses is vital for any company in the industry to generate a stable cash flow and decent revenue. Here are a few recommendations from professionals to improve the profitability of the company:
- Do not underestimate forecasts: identifying trends allows you to understand future sources of income, the direction of costs, and available capital. Based on these data, a specialist may compute the potential cash deficit or surplus to operate according to the accounting equation.
- Analyze the terms of billing and payment specified in the contracts: funds must be credited to the accounts on time. Be sure to consider the initial costs of organizing construction processes, e.g., you can ask the client to pay for materials after they are delivered to the job site.
- Plan your tax payments: large businesses often have to transfer huge sums to the budget, which does not allow them to expand their activities. Qualified construction bookkeeping enables you to calculate the tax burden to avoid IRS claims correctly.
- Offer better terms to early-paying customers: while some entrepreneurs complain that raising capital early can lead to future cash shortages, such payments improve negative cash flow.
- Be prepared for force majeure: experts recommend creating a financial cushion in significant crises. Review your financial statements to calculate your average 30-day expenses and set aside enough cash to cover at least three months of operating expenses with no capital inflow.
Establish constant communication between construction bookkeeping specialists, project managers, and stakeholders to ensure adequate capital management.
Example of successfully solving financial problems
BooksTime helps businesses in various areas manage their finances; one of its customers is the broker organization Center Realty Group (CRG). The company’s administration turned to specialists with a request to help reorganize the structure of financial data, which would reduce the risk of losing valuable information or misclassifying it. Team of dedicated experts successfully structured the database and now provides a full range of bookkeeping services to boost business efficiency.
Have you already appreciated all the benefits of cooperation with BooksTime specialists? Then tell other people about the company and take part in the referral program. Each new client will receive a $200 discount on their first account, and you will also be able to spend $200 less during your next interaction with the professionals. Start improving your finances today.