573: Navigating Construction Cash Flow Challenges, Myths, And Facts

This Podcast Is Episode 573, And It's About Navigating Construction Cash Flow Challenges, Myths, And Facts

In the world of small businesses, positive cash flow is king. The driving force keeps your business engine running smoothly, covering all your liabilities. But what happens when outflow exceeds inflow? Cash flow problems ensue, threatening the survival and growth of your construction business.

These cash flow problems can originate from various sources, including macroeconomic issues like recessions, natural disasters, wars, and microeconomic problems like business decisions and performance. However, careful planning and smart accounting practices can cushion or even avoid these financial blows.

Managing cash flow is a vital part of running a successful construction business. Some contractors think managing cash flow means tracking how much money enters and leaves their business, but more goes into it. 

[Starting Cash + Cash In - Cash Out] = Cash Flow

Contractors and sub-contractors know there is more to profits than shown above, and most of you rely on your "gut feel" to see when the project has made a profit.

Unfortunately, many cash flow myths and misconceptions can lead to poor financial decisions. For a better understanding, how about a mindset shift first?

Myth: Profit equals cash flow. 

Fact: Profit is not the same as cash flow. A business can be profitable but still have cash flow problems. Profit is the amount left over after all expenses are paid, while cash flow is the amount of money that comes in and goes out of the business. 

Myth: Increasing sales will solve cash flow problems. 

Fact: While increasing sales can help improve cash flow, it is not a guaranteed solution. If a business is not managing its expenses properly, increasing sales will only exacerbate the cash flow problem. It's essential to focus on controlling expenses as well as increasing sales. 

Myth: Cash flow problems are always caused by slow-paying customers. 

Fact: Slow-paying customers can contribute to cash flow problems but are only sometimes the root cause. Factors such as overstocked inventory, underutilized equipment, or poor project management can also impact cash flow. 

Myth: Borrowing money is the only way to improve cash flow.

Fact: While borrowing money can provide a short-term solution to cash flow problems, other options exist. Construction businesses can also improve cash flow by reducing expenses, increasing sales, and negotiating better payment terms with vendors and customers. 

Construction businesses can make better financial decisions by understanding the facts about cash flow. 

Let's delve into some common cash flow issues and explore how you can manage them effectively.

Problem: Lack of cash reserves

If your contracting business's revenue drops, having enough cash reserves to cover up to six months of expenses can be a lifeline.

Solution: Project your cash flow by estimating your sales, determining payment timelines, and estimating all expenses. Your accountant can help you create cash flow projections in your accounting software so you know where you stand financially.

Problem: Expensive borrowing

High-interest credit cards and business loans can significantly affect your business's revenue.

Solution: Consider supplier financing or refinancing loans to secure lower payments. Term loans with competitive rates can also help improve cash flow.

Initiate a discussion with your lenders if interest only or deferred payments on outstanding debts are possible.

Request more flexible payment options

It never hurts to ask, especially if you've been transacting with your vendors for a long time and you've established a certain level of mutual trust and confidence. You can request more flexible payment options or longer payment terms.

Tap into available credit lines

Take advantage of available lines of credit and place the funds in interest-bearing accounts.

Problem: Decreasing sales or profit margins

Offering too many discounts or pricing your products and services too low can result in low-profit margins.

Solution: Create a short-term business survival plan and adjust your pricing strategy accordingly.

Problem: Outstanding Receivables

Late invoice payments can tie up your money and affect your business's cash position.

Solution: Review payment terms, send invoices early, accept multiple payment methods, offer incentives for early payment, and, as a last resort, consider selling your debt through invoice factoring.

Make invoicing a priority—get paid faster and aggressively follow up on invoices. Small businesses in the construction industry risk having their clients not pay them on time—or at all. Being too passive in collecting unpaid invoices or reminding clients when payment is due will not help you collect the money you need to pay your bills.

Sending out reminders of due invoices can speed up getting you paid and encourage clients considering not paying you to reconsider. Reach out to clients if necessary to discuss payment options. Even a payment schedule is better than no payment at all.

Problem: Uncontrolled business growth

During high-growth phases, cash flow shortfalls occur when expenses exceed working capital.

Solution: Slow down and get your finances in order. Implement new accounting measures for a clearer picture of your financial situation.

Problem: Inaccurate forecasting or bookkeeping practices

Cash management may become more complex as a business grows, leading to forecasting errors.

Solution: Hiring a professional accountant or bookkeeping service will help you to avoid accounting mistakes.

The financial aspects of a construction business are complex and take much time and planning. That can add demanding responsibility to the business owner.

Hiring someone to take care of the financial aspects of your business or even to advise you about the decisions you face can take the stress off you. That's precisely how we can help. Having someone on your side with financial expertise and construction experience to assess your business, advise you about your cash flow, and help you secure funding. With the time and money you'll save, it will be worth it in the long run.

Final thoughts

Addressing these common cash flow problems can protect your business's health. Cash flow problems may seem overwhelming, but they are manageable with the right tools and insights.

We can advise you on comprehensive solutions to suit your specific situation, empowering you to make informed decisions and manage your finances effectively.

PS 

We offer free resources to help you save time and money that you can download and print now. 

About The Author:

Sharie DeHart, QPA, co-founded 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. She offers insights on managing 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