Having enough cash to operate your business is often the crucial difference between success and bankruptcy. Yet many construction businesses leave cash flow forecasting out of their financial toolkit.
Cash flow forecasting is often viewed as either an unnecessary distraction or an overwhelmingly intimidating task. So why bother?
Why is cash flow forecasting in construction crucial?
1. Spot gaps and address them in good time
Even the best contractors often feel the pain of cash droughts as money comes in infrequently and in large chunks. It is important to place your company in a position to respond rapidly and effectively to prevent a cash crisis.
Maybe you’ve paid for materials before your client pays you… Maybe you’ve had to invest in some equipment in order to service a contract… Maybe there’s a gap coming up between jobs. Forecasting your cash flow will help you understand whether you can weather the storm, need to put short-term funding in place or need to make cut-backs.
2. Track spending and stay in budget
Could you jot down your financial forecast on a piece of paper from the numbers in your head? How about tracking performance towards that forecast? Even if the answer is yes, will the paper alert you if you’ve gone over-budget?
Properly forecasting your cash flow will better prepare you for the future and for serious discussions with your stakeholders. You need to know when you’re over or under budget so you can adapt your forecast moving forward.
3. Pay your staff and contractors on time and in full
Maintaining a positive organizational culture and strong relationships with your subcontractors will require you to be a responsible and timely payer. Forecasting how much cash you will have in the bank will show you whether this is possible, or whether it’s time to manage expectations with employees and suppliers.
4. Maintain good relationships with your suppliers
We’ve all been in a position where we want our suppliers to go the extra mile for us. Maybe we need something delivered yesterday. Maybe we’re asking for a value-add that’s slightly outside the original scope. Whatever it is, we’re only going to get favors from our suppliers if we have a good history with them. Being a good payer is a big part of that.
5. Prepare yourself for external changes
What if a subcontractor increases their rates? Or what if the government grant for a future project is delayed? Any external change may have a direct knock-on effect on your cash flow.
Looking to the future, not to the past will help you understand the repercussions of such a change. What effect could this have on your cash flow next month or six months down the line? It is this information that will guide you through making crucial operational decisions.
6. Plan for the future(s)
Are you thinking of expanding into bigger offices, or growing your sales team, but you’re not sure if you can afford it? In any eventuality, you need to properly plan where your cash is going to understand whether it’s doable.
7. See when you can afford to invest in your business
If you have a significant amount of cash in the bank, you’ll need to run a cash flow forecast to ascertain whether you are in a good position to reinvest that cash into your business. Can you afford to invest in new equipment, or expand your business development team without upsetting the financial balance?
8. Avoid trading while insolvent
One of the most obvious reasons to forecast your financial future is to avoid becoming insolvent. A company becomes insolvent when it can no longer pay its bills, or when its liabilities outweigh its assets. If things are going downhill and you’re becoming insolvent, you will usually have a legal duty to stop trading. This doesn’t happen overnight, so ensure you’re prepared by creating a simple financial forecast.
How do you forecast your cash?
So how do you go about creating a forecast? You can either 1) ask your accountant for help creating one, 2) do it yourself in Excel using a template, or 3) use a cash flow forecasting tool like Float. Getting a clear picture of where your hard-earned cash is going isn’t that hard, and it’s very much worth it.
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