A construction company’s cash flow is a powerful attribute. A healthy cash flow can open the door for growth and your ability to bid on larger projects. However, managing cash flow is a major headache for many small to medium-sized construction businesses. Most business owners would prefer to focus on sales and new business development instead of managing their cash flow. Unfortunately, neglecting your cash flow can thwart the growth of your company and even lead to its demise. By following the eight tips below, you can better manage your construction company’s cash flow.
1) Ensure that customers are aware of all of your accepted forms of payment.
Most construction companies accept multiple modes of payment, including credit card, bank wire transfer, cash, and checks. Avoid the tendency to offer cookie cutter “Net 30” payment terms to every customer. In addition to causing delays in your cash flow, this practice ignores the possibility that some customers are willing to pay in advance. To avoid any confusion, post your accepted modes of payment on your website, on each quotation, and on every invoice.
2) Think twice before you offer payment terms to new customers.
Failure to carefully screen your customers before offering credit or payment terms can be disastrous for a growing construction company. A customer’s refusal or inability to pay for just one large project can have a dramatic impact on your company’s cash flow. Check your customers’ credit references with care before extending payment terms.
3) Get into the habit of sending invoices to your customers right away.
Designate a person at your company to handle invoice distribution and contact customers to confirm that customers have received all pending invoices. You can expedite your receipt of payment by sending electronic copies of invoices immediately upon completion of a project.
4) Keep track of seasonal patterns in your cash flow and plan accordingly.
Most construction companies experience seasonal fluctuations in business. Identifying your busiest times of the year is important because you want to make sure that you have plenty of cash on hand to handle large projects. Tracking seasonal patterns will also help you forecast equipment and staffing needs more accurately.
5) Identify your top customers and incentivize them to pay as services are rendered.
Remembering the Pareto Principle will help you keep an eye on your key accounts. According to this principle, the top 20% of your customers account for 80% of your sales and resulting cash flow. Keep your key accounts in mind as you develop strategies to optimize your cash flow.
6) Offer discounts to all customers who pay in advance.
Customers who remit payment in full when they place an order are an asset to your business. They provide an immediate cash infusion for your company and deserve to be rewarded for their continued support.
7) Plan in advance for holiday shutdowns.
Major holidays such as Christmas can put added strain on your cash flow, especially if your construction company is closed during the week between Christmas and New Year’s Day. In addition to reduced revenue due to your company’s closure, your customers’ payments to you might be delayed due to bank closures or staff vacations.
8) Don’t give customers an excuse to delay payments.
Just one oversight or incorrectly addressed invoice can delay receipt of your payment for your work. Make sure that you have completed all projects according to the terms that you and your customer agreed upon in your contract. Make sure that your customer’s address is correct before mailing invoices. E-mail addresses should also be updated for accuracy periodically if you send invoices electronically.
Clearly, there are many steps that you can take to improve cash flow for your construction business. By following the tips above, you can make sure that you avoid cash flow headaches.