How Construction Companies Can Manage Cashflow and Run Lean

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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:

  • Collect. Contact companies and customers that owe you, targeting the oldest outstanding payments. If they are experiencing disruption or setbacks, consider offering a partial payment option to get cash flowing into your business. If you have a good relationship with a customer who is doing well and is able, you might request advanced payments.
  • Extend. On the payables side, talk with your suppliers, vendors, lenders and any others you owe about the potential to defer payments and/or extend payment terms and lines of credit should the need arise.
  • Negotiate. Adjust your contract terms to ensure that you’re covered to stay in business as work progresses. For instance, requiring more substantial incremental payments from a customer throughout a project will keep you from reaching into your own pockets. On the flip side, you might stipulate with suppliers that you don’t pay for materials until you are due payment for them. You might also ask for extended payment terms with suppliers to provide more flexibility.
  • Communicate. Talk to your suppliers, customers, general contractors and lenders about any issues and identify any potential disruptions that have the potential to impact your business. Strategic planning is a critical component of mitigating risk in the future. Do they ever struggle to import product types or collect payments themselves? Could this impact their ability to deliver?
  • Reserve. At any opportunity, stow away funds into an operating cash reserve account. Essentially, this is an interest-bearing savings account you create to relieve cash flow pressure from your business. It’s a wish-list item, but one you can strive to contribute a small percentage to with every project.

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.

  • Potential legal action against you.
    How have you been impacted previously? How did you communicate that impact to those who rely on you? Were you able to fulfill your contracts? Are you currently headed toward any legal trouble?

    If you have a good relationship with relevant parties and keep them informed, you may be able to avoid greater difficulties. If you have to deliver any notifications on legal matters, communicate and document them formally. Further, see if your contract includes a clause that protects you in specific situations. If so, you may be able to create new contracts and terms.
  • Potential legal action by you.
    Could severely delayed payments clog up your cash flow? To stay in business, you may need to file liens. In some instances, simply communicating with the customer can get the payments moving. However, if it doesn’t, be sure you understand the notification and documentation requirements you’ll have to meet before you can file a lien. Consistently stay atop of these documents as new requirements may arise.

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.

  • Upcoming projects. Do you have plans to expand your geographic area or purchase new equipment? Should these investments wait until your finances are healthier?
  • Fixed assets. Do you have fixed assets you can refinance to put more cash into your business? Or are there opportunities to rent fixed assets out?
  • Operations. Can you reduce the cost of operations, such as with energy usage, storage or rent?
  • Personnel. How are you actively working to retain and incentivize employees considering the labor shortage, high cost of recruitment and hiring, and existing difficulty maintaining employees across industries?
  • Technology. Do you use outdated technology that adds steps and inefficiencies for your employees? Have you looked at investing in new technology options?

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:

  • Have you supplied consistent processes for your estimators to use for job costing?
  • How often are poor estimations due to costing errors versus real-time issues?
  • Are your estimators accounting for all expected costs associated with a project?
  • Are estimators taking shortcuts?
  • Do certain jobs or tasks never turn a profit?
  • Do certain jobs or tasks consistently turn high profits?
  • Do you use a software with up-to-date functionality that supports accurate job costing?

Put your findings to work immediately in all upcoming project estimates.

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 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.

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