Maintaining positive cash flow is a struggle for every business, but especially for those in construction. For most construction businesses, cash is flowing out faster than it’s coming in. According to a recent survey by Billd, more than 60% of construction contractors say they’ve had to pay supplier bills before their customers paid for the project, resulting in negative cash flow. When cash flow runs dry you can’t pay your employees or suppliers, nor make a profit.
How cash flow challenges impact your construction business
More than two-thirds of small businesses say they struggle with cash flow problems, according to recent QuickBooks data. And for construction professionals, the stress caused by cash flow challenges are even higher.
According to a 2021 Construction Cash Flow Report, 97% of construction professionals say they experience stress from slow payments and cash flow challenges. Only 11% of contractors say they are paid in full for every job, and even less (9%) say they always get paid on time. These payment problems can stall the success of your construction business by:
Negative cash flow can prevent you from taking on new, lucrative projects while you’re paying off an old project, waiting for final payments to come in, or delaying the completion of a current project while you wait for additional capital. Your business needs new projects to maintain momentum—getting stuck in the cash flow vortex is frustrating for you and your team.
Your business doesn’t stop moving, even when the cash does. You still need to pay employees and suppliers, and many contractors turn to business loans to cover negative cash flow. But constantly paying off old debts, including loans, restricts your ability to invest in your business and grow your company.
Paying employees late, or worse, not at all, results in high employee turnover and decreased productivity on the job site, which can delay projects (and cash flow) even further. When employees leave, they take their proprietary knowledge and skills with them, leaving big shoes to fill. And you might find it difficult to recruit new workers to fill their role—job seekers in the industry will avoid companies that notoriously struggle with cash flow.
3 ways to overcome cash flow challenges
There are a few easy fixes you can implement right away to build better cash flow. Improving the processes you already have can help you get paid faster. Here’s how:
1. Build more accurate estimates
Building project estimates requires you to predict the future—a task that’s never been easy without a crystal ball. You need to estimate how many labor hours the job might take, what you’ll need in terms of supplies and materials, and any other surprise expenses that might spring up along the way.
The further your project bid strays from reality, the less money you’ll take home at completion. Today’s high labor costs combined with the higher cost of materials has narrowed the margin of error even further. It’s never been more important to get job estimates right.
But many construction contractors are still building estimates manually and without cold, hard data to back up their claims. Improve the accuracy of your estimates and lower the risk of underestimating a bid by:
- Track your job costing for every single project. You can track and create job costing reports to compare similar projects and pinpoint where past estimates went wrong.
- Reviewing and documenting project costs every day, so you can catch projects going off budget before it’s too late.
- Tracking employee time on the job site. With accurate employee time data at your fingertips, you can better estimate labor hours and build more accurate invoices.
- Investing in construction accounting software to take the bookkeeping burden off your shoulders and increase the accuracy of your reports and estimates.
2. Oil your invoicing machine
For many contractors, late payments are the driving force behind their cash flow challenges. Despite the standard 30-day payment terms most contractors use, the average payment turnaround is 51 days, according to a study by Rabbet.
If payments are consistently coming in late, or not at all, it’s time to look at your invoicing processes and update any rusty parts.
- Invoice as quickly as possible. Reduce your waiting time by invoicing clients right away. Send invoices electronically to avoid mailing delays and confirm receipt.
- Include clear payment terms on every invoice. This includes the due date for the total amount owed, payment plans details, and accepted payment methods.
- Make payments incredibly easy by accepting multiple payment methods or allowing customers to pay invoices online. Gone are the days of paying invoices by mail.
- Use invoicing software to build professional, accurate invoices and deliver them electronically. Send payment reminders automatically and easily track unpaid invoices.
- Review outstanding invoices weekly to avoid forgotten invoices or money falling through the cracks.
3. Get paid faster
The faster you get paid, the faster you can get back to work and make more money for your business. This one is simple: Encourage clients to pay quickly by incentivizing early payments and penalizing late payments. A small discount or reward can motivate clients to pay earlier. And a small late fee can persuade clients who might otherwise drag their feet to make the payment deadline.
Improve your accounting, improve your cash flow
No one really goes into business because they enjoy bookkeeping (except, perhaps, bookkeepers). Many small business owners aren’t completely confident doing their own accounting, and contractors are no exception. Keeping clean financial records, creating job costing reports for every project, and improving invoicing processes benefits more than your cash flow.
Accurate financial reporting allows you to use past data to better predict future estimates and keep tabs on your profitability. But it comes with other perks, like identifying opportunities to cut costs and save more money, eliminating missed payments or bills, and making overall better financial decisions that add up quickly over time. One study found that tracking cash flow with software can result in a 50% reduction in loan interest paid.
The QuickBooks and Knowify integration can help you manage job costs, build invoices and estimates, and create custom reports with accurate insights that help you grow. Seamlessly syncs clients, vendors, items, expenses, and payments between the two so you can manage your construction business and your accounting in one place. Get started today.
Myranda Mondry is a content creator and researcher at Intuit QuickBooks, the #1 accounting software. Based in the up-and-coming tech community of Boise, Idaho, she has a journalism degree from Boise State University and a serious passion for helping small businesses succeed.