Construction accounting covers a lot of areas, and one of the items at the top of that list is cash flow management. Effective cash flow management is essential for construction companies to maintain a healthy financial position and finish their jobs by the deadline. By managing cash flow effectively, construction companies can ensure they have enough funds to cover their expenses, purchase inventory, and invest in their business. So what does it take to accomplish this? Following the seven tips below will help put you on your way.
1) Construction Accounting Starts with Accurate Budgeting
Developing and sticking to a realistic budget is essential for effective cash flow management. Construction companies should accurately estimate costs for materials, labor, and equipment, and regularly monitor their expenses to ensure they are staying within budget. Don’t forget about overhead; that needs to be built into your quotes and project planning as well. Accurate budgeting can help construction companies avoid unexpected costs and identify potential cash flow gaps early on.
2) Timely Invoicing and Payment Collection
Construction companies should invoice clients promptly and ensure that they have clear payment terms and timelines in place. They should also follow up on overdue payments to ensure timely collection of receivables, and consider offering discounts for early payment. Doing so can help construction companies improve their cash flow and reduce the risk of cash flow gaps.
3) Negotiating Payment Terms with Vendors
Construction companies should negotiate favorable payment terms with their vendors to help manage cash flow. For example, they may be able to negotiate extended payment terms or volume discounts for bulk purchases. Negotiating payment terms with vendors can help construction companies manage their cash flow by spreading out payments over a longer period and paying less than their competitors.
4) Effective Inventory Management
Construction companies should manage their inventory effectively to minimize waste and avoid overstocking. This can involve closely monitoring inventory levels with a perpetual inventory system, optimizing storage space to store bulk materials obtained at a discount, and negotiating favorable terms with suppliers. By managing inventory effectively, construction companies can reduce their costs and improve their cash flow.
5) Monitoring Project Progress
Construction companies should monitor project progress regularly to ensure that they are on track to complete projects on time and within budget. They should be prepared to adjust their plans and budgets as needed to accommodate any unexpected changes or delays and communicate those changes to their clients. Surprising a client with a higher bill at the completion of the project will likely result in an argument, and possibly delayed payment, which can affect your other jobs. By monitoring project progress, construction companies can identify potential cash flow gaps early on and take steps to address them.
6) Financing Options
Construction companies should accurately estimate costs and establish payment terms that support the cash flow they need, whether than involves down payments, progress billings, or other financing. Financing options, such as lines of credit or short-term loans, can help manage their cash flow during periods of slow business or late-paying clients. Calculate the primary methods of funding your jobs and have backup plans to stay in business if something goes wrong.
7) Find a Construction Accounting Partner
Working with a professional accounting firm that understands the challenges of running a construction business can help you stay on top of the financial details you need to be able to make smart decisions. Providing you with financial reports and insights can help you better understand your overall business position and manage your cash flow.
By implementing these seven tips, construction companies in the Minneapolis-St. Paul region can improve their cash flow management and achieve greater financial stability.
Construction Accounting with Haworth & Company
If you need assistance with your construction accounting, including cash flow management, the experienced accountants at Haworth & Company can help. Contact us today to learn more about our construction accounting services and how we can help you achieve your financial goals.
