Containing costs and managing cash flow can be difficult for any business, but the construction industry is particularly challenged. Due to the structure of payment terms, overdue receivables can accumulate easily. Plus, nailing the formula for job costing is a perpetual issue that leaves many companies breaking even on projects – or worse.
Today, construction industry leaders are also battling supply chain disruption, steep fluctuations in economic conditions, a labor shortage and the Great Resignation. When you’re caught up being reactionary on a daily basis, managing added expenses related to supply delays and price hikes, and scrambling to staff a project, it’s easier to do what it takes to get the job done today than to zoom out and ask: Can we run leaner and improve our cash flow?
These very issues that keep construction professionals busy and stressed also leave many businesses operating with extremely tight cash flows. They also make it difficult to pursue lean principles, which would take time and investment to implement and incorporate into existing processes.
However, the benefits of paying attention to and carefully managing cash flow in construction are well worth the investment of energy and resources. Simply analyzing your existing cash flow can reveal critical hitches and failures in your processes that keep you from capturing a project’s true value. Going further to consider cash flow improvements, such as invoicing sooner to get paid sooner, can put you on a track toward growth and greater profitability. This is opposed to hovering at neutral in your accounts.
Additionally, running lean can be the very tactic that helps your business thrive when labor is difficult to find and retain. Having the facts on your cash flow will inform ways you can optimize your business according to lean practices.
To prepare for cash flow sustainability, the key to staying in business is maintaining plans for 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 too slowly 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, you should also assess your own viability. Keep this process steady by preparing for any legal action by 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.
Robotic Process Automation is not only great for lean operations, it’s also great for retaining talent at your organization.
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.
Take the time to perform thorough comparisons of actual versus estimated project spending to determine where you need to control costs.
Then, to discover the reasoning behind these comparisons, analyze them and your processes:
Put your findings to work immediately in all upcoming project estimates.
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 being successful and weathering any kind of disruption.
Once you have adopted these methods to run a more lean construction company, and have a plan in place 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. You should then document plans of action for each scenario to ensure you’re prepared for the best- and worst-case scenarios in the future. Our team of experienced construction industry advisors can help you develop plans to build a solid financial future.
Once you’ve discovered opportunities to run lean at your organization, you can start laying out how you’ll get there with technology. For many, approaching technology investments with an eye toward digital transformation will have the greatest outcomes.