477: Ways To Sustain The Life Line Of Your Construction Company

This Podcast Is Episode Number 477, And It's About Ways To Sustain The Life Line Of Your Construction Company

 

Cash flow refers to the movement of money into and out of your business. It's based on the amount of money you bring in minus the amount you spend. A positive cash flow means bringing in more than you're spending. A negative cash flow means you aren't bringing in enough to cover your expenses.   Your construction company can run into problems by not charging enough for goods or services, having late-paying clients, growing too quickly, or simply spending too much money.   Solid cash flow management is vital to ensuring your contracting business survives, but not everyone understands what cash flow is or how to manage it. That's likely what makes it a leading cause of stress for small business owners.   

Cash flow can vary throughout the year, depending on sales cycles or whether you've made a large purchase. 

Here are three strategies you can use to gain control over your cash flow.

1. Understand your profitability

Managing your cash flow is excellent, but it won't help if your business isn't profitable. Determine where your business is most beneficial and where you're dealing with cost overruns. Look at your services to determine how much they bring into your business compared to how much you spend to provide them. Find any inefficiencies in your processes and eliminate them if possible.

A solid cash flow ensures you offer excellent goods and services and help you achieve your goals while reducing those negatively affecting your finances. You may need to increase your prices to reflect the cost of goods sold.

Similarly, take a look at your clients. Are there some that you are undercharging or spending too much time and energy on? Can you increase their fees or find higher-paying clients? (I have recently discussed these points in my Tuesday email. If you don't want to miss out, you can subscribe by filling out the form on the right).

2. Write a cash flow forecast.

Your cash flow forecast (a cash flow projection) predicts how your construction business will perform financially over a set period. It's a good idea to have a cash flow forecast for a year, broken down into quarters and months.

The projection considers your revenue and expenses over those set periods and helps you figure out how much you need to make in that period to cover your costs. It can also allow you to anticipate any upcoming cash flow issues, such as slower periods that may require you to cut back on expenses. If you have any anticipated big-ticket items you'll need to buy or plans to expand your business, include those in your forecast.

Periodically check your actual cash position against your projection to see how you're doing and if you need to make any adjustments.

3. Use technology to keep on track.

Plenty of software solutions can help you gain insight into your company's cash flow. They can help you build projections and get a real-time view of how your business is doing. This information can then be shared among company managers, so everyone knows how the company is doing financially and where strategies need to be put in place or altered to get you back on track.

Additionally, invoicing and project management software can encourage faster, more manageable client payments and keep projects on budget. This will also improve your cash flow.

What we can do:

A wise business owner once said, "Happiness is a positive cash flow." As a business owner, I'm sure you agree. Everything is better when your cash-in exceeds your cash-out.

A cash crisis can be emotionally devastating and even kill your business. You know what I mean if you've ever had to beg, borrow, and steal to cover tomorrow's payroll.

Having a proper cash management system allows you to:

Know when, where, and how your cash needs will occur. Know what the best sources are for meeting your additional cash needs. Be prepared to meet these needs when they occur by keeping good relationships with bankers and other creditors.

The starting point for avoiding a cash crisis is allowing your accountant to develop a cash flow projection for you. Your construction accountant can help you develop both short-term (weekly, monthly) cash flow projections to help you manage daily cash and long-term (annual, 3-5 year) cash flow projections to help you develop the necessary capital strategy to meet your business needs.

Also, well-kept historical cash flow statements help you understand where the money went.

Accurate cash flow projection has several benefits and will make many procedures easier for your construction company. 

Our services can provide you with:

Help in obtaining an appropriate line of credit Cash collection acceleration techniques Proven effective collection policies Established effective payment policies Help in getting the maximum rate of return on your idle cash

Cash flow is the lifeblood of any construction company and especially the ones with annual sales volume under $1,000,000. Some Construction Company experts even say that healthy cash flow is more critical than your contracting company's ability to complete projects! 

While that might seem counterintuitive, consider this: if you fail to satisfy a customer and lose that customer, you can always work harder to please the next customer. If you do not have enough cash reserves to pay your suppliers, creditors, and payroll, your Construction Company is out of business; game over!

Final thoughts

Many business owners find cash flow management stressful, but with a bit of information and planning, and by using the right tools and the right construction accounting consultant, you can have better insights into your company's financial situation. Those insights will help you make better decisions for your business and gain control over your Construction Company cash flow.

About The Author:

Sharie DeHart, QPA is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on how to manage the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com