Containing costs and managing cash flow is difficult for any business, but the construction industry is particularly challenged. Due to the structure of payment terms, overdue receivables accumulate easily. Plus, nailing the formula for job costing is a perpetual issue that leaves many companies breaking even on projects – or worse.
These issues leave many in the industry on thin ice as far as cash flow, making it difficult to survive any crisis, let alone one that disrupts supply chains, creates new health hazards, and strikes the economy the way COVID-19 has. If you’re experiencing cash flow problems that aren’t sustainable, the key to staying in business is swift and strategic action.
1. Get cash flowing.
In construction, general contractors pay their subcontractors when they get paid, and the money trickles down from there. As a result, construction companies accumulate receivables that are 90 to 120 days overdue. This leaves many operating in debt or near-debt, with payments coming in at a snail’s pace and far behind the company’s output. To rejuvenate your cash flow:
2. Cover your bases.
While you’re assessing the viability of those you rely on, also assess your own viability – and keep it steady by preparing for any legal action by you or against you.
3. Contain and optimize operational costs.
Construction operations are often busy, and daily activity can keep leadership from identifying unnecessary spending and costs. If you were to look closely at your operational expenses, upcoming projects and fixed assets, you might find you’re losing money.
Cost containment can help construction companies manage and run lean for a stronger future.
4. Improve your estimate accuracy.
Accurate construction bids are an important part of a contractor’s financial health, as many project losses can be traced directly back to bid errors. Poor job costing and estimating practices often lead to low bids that don’t bring in enough cash for the business to survive. Again, if you add in a crisis like the COVID-19 pandemic, survival gets even more difficult.
Take the time to perform thorough comparisons of actual vs. estimated project spending to determine where you need to control costs. Then, to discover the reasoning behind these comparisons, analyze them and your process:
Put your findings to work immediately in all upcoming project estimates.
5. Keep up with taxes, loans and relief.
Governments and business associations are constantly making updates as they adapt to the COVID-19 pandemic. Plus, all business owners know that even in less challenging times there are constant changes to keep up with as far as tax filing and payments, loans and more. Understanding these changes will help keep cash flowing, and loans and relief may be key to staying operational. Also, consider taking advantage of the research and development (R&D) tax credit to improve cash flow. Innovative construction activities, such as those that improve products and services, qualify. And relevant wages and supplies qualify as expenditures.
Do you need a guidance around different loan programs or internal calculations?
Contain costs and improve cash flow to fortify your business.
Taking these steps to speed up slow cash flow, contain unnecessary costs, improve on inefficient processes, and take action toward a more sustainable financial model, are key to making it through when the future is uncertain. They’re especially important when you’re operating a business through one of the worst potential scenarios. Once you have a plan for a healthier, more stable cash flow, the next step is to forecast multiple scenarios that might happen in your business in the coming three to five years, and then to document plans of action for each to ensure you’re prepared for best- and worst-case scenarios in the future. Such business continuity planning is essential to a secure future for your company.
In times of uncertainty, you must thoroughly assess your financial and operational conditions before you take any action. Knowing where you stand today will help you pinpoint the exact actions that will get the best results for your business. To start, ask critical questions about pre-existing conditions, and identify inherent risks like outdated technology, supply chain disruption and inefficiencies.
Get our step-by-step guide to containing costs and managing cash flow in the wake of COVID-19 to navigate this pivotal process.