Building a company is no easy task, especially if you’re in construction. Among the many challenges, one of the major problems that plague many construction companies is cash flow.
There are more than1.5 million construction firms in the U.S., according to the North American Industry Classification System, which means a lot of competition for every job. Frequently, the owner of a construction company might have to finance a project through completion before getting paid. That can be challenging for any small business looking to make payroll or satisfy a subcontractor.
There are many reasons your construction business may be tight on funds. Lags between billing and collection, investments, cash advances to employees and legal settlements can all be possible contributors to a construction cash-flow gap.
If you're experiencing a cash flow gap, you're not alone. According to a recent survey, 70 percent of small businesses have experienced late payments on invoices within the last year.
How to manage construction cash flow
The good news is that there are many things you can to do better manage your cash flow so you can take on that next big job:
1. Managing outflow as well as inflow
Take extra care to manage your contracts with vendors, suppliers, and subcontractors. Try to negotiate payment terms that match your cash expenditures as best as you can.
2. Offer an incentive for paying early
It's not the best solution, but between missing payroll and impacting overall revenue, it may be an option. By choosing to offer your clients a slight discount if they pay their invoices early say, 1 or 2 percent off if checks are sent within 10 days chances are you'll find your invoices will clear faster.
3. Alternative financing
Rather than waiting to get paid, you could also consider making use of a service like Fundbox that allows advancing your outstanding invoices. You’ll have the capital in your bank account the next day, giving you the agility necessary to respond quickly to new opportunities. Additional options for business funding include short term loans and unsecured business lines of credit.
4. Hire awesome project managers and use a time tracking software
As much as 85 percent of the cash construction companies have on hand comes from projects in progress. So don’t forget that stellar project management starts with the people you put in charge and the tools you choose to implement. If your construction company manages all of its projects effectively, it’s likely your cash flow will follow suit.
5. Don't overlook your closeout process
It matters how you finish. As you near the end of the project make sure you’ve documented your man-hours and identify any items that might hold up payment with the customer and address them quickly. Customers will release the cash faster if you make the closeout process easier.
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Anna Eschenburg is the senior marketing manager at Fundbox. Fundbox offers business owners a simple way to fix their cash flow by advancing payments for their outstanding invoices, giving small businesses back the power to control their cash flow. Learn more about Fundbox here.