Sure, your construction company needs the best lumber, equipment, and workers to get a job done. But there’s something else you need to operate your business, something that you can’t afford to overlook: cash. Learning how to increase cash flow is pivotal to your success.
The construction industry has historically struggled to improve cash flow. Given the nature of the business and how long-term projects inevitably tend to be the norm, it takes time to collect all of the cash from a particular contract. Not only do most projects take a long time from start to finish, but on average, 46% of contractors can expect payment delays of 60-90 days or more.
But without increasing cash flow, your construction business will suffer. You need cash to purchase equipment, pay employees, buy supplies and resources, and more. Yes, profits are essential to a successful company—but if you’re not bringing the cash in quickly enough, even a profitable company won’t be able to grow.
20 Tips to Increase Cash Flow in Your Construction Business
1. Understand the state of your cash flow
Any action you take to increase cash flow should be evidence-based and backed by the data you’ve collected. The first step you need to take should be to prepare your company’s cash flow statement. That way you can understand where you’re successfully bringing in cash and where you’re struggling so you can make fully informed decisions to improve.
2. Use accounts receivable systems
Especially in your business where long wait times to receive payment are almost unavoidable, you need to ensure your accounts receivable information is highly organized so you know who owes you money, how much, and when they’re supposed to pay.
3. Invest in accounts receivable software
On top of that, you can invest in technical systems and software that send you reminders of when payments are due and help you send automated messages to your clients who have outstanding bills that are coming up or are overdue.
4. Project your future cash flow
The steps you take now to improve cash flow should be based on how much cash flow you expect to bring in in the future. By calculating your cash flow forecast you can get a sense of how much cash you will need and whether you need to take additional actions to bring in extra cash.
5. Take out a business loan
If you can see that your future cash flow will be insufficient to meet your business’s needs, then you can explore taking out a business loan from Camino Financial to bolster your cash-on-hand.
6. Make investments in external companies
You can also consider using the company’s money to invest in other ventures to bring in additional cash. Your external investments don’t need to relate to construction—in fact, it might be wise to invest in something unrelated to construction. In case there are industry-wide problems, it’s best practice to diversify your investments.
7. Negotiate favorable contract terms
As we already discussed, the construction industry is notoriously one of the most difficult for companies to receive timely payment. That’s why you need to very carefully and strategically consider the payment terms you establish for each client. Of course, your goal is to receive cash as quickly as you can. But establishing terms that are too onerous for the client might discourage them from working with you at all—especially if competitors have more lenient rates. So you need to find a balance of accommodating client needs without being too lax in terms of requiring payment.
8. Consider imposing late fees
You can add fees for late payment, but again, be careful not to ask too much of your client when they can seek alternative contracts.
9. Shop for the best prices
The best way to preserve cash-on-hand is to limit how much of it you give away. Shop around for the best prices for all your equipment, tools, and materials that you need to complete any project. Even if you have a go-to supplier, don’t let that dissuade you from seeking alternatives. Of course, sometimes quality is more important than cost—but for the long-term viability of your company, you need to make sure you’re getting the best deals available.
10. Sell old and no-longer-needed equipment
Construction companies have valuable assets—many of them you are likely to replace with newer models or no longer need because they’re only useful for particular projects. Always be on the lookout to sell equipment like this and try to fetch the best prices for them.
11. Combine the use of contractors and hired staff
Similarly, you need to make sure you’re assembling your workforce in a cost-effective way. With contractors, you can limit the benefits you have to give away in terms of health insurance and retirement plans. But for certain positions, it makes the most sense from a business and even a cost standpoint to hire and retain full-time personnel. The cost of training new staff for each position can be too burdensome for your company. Your construction business needs a mix of hired staff and contractors.
12. Constantly revise your budgeting process
New businesses—and even established ones, too—must constantly assess their inflows and outflows of cash and determine how much they need on hand at any given time. It’s important to reevaluate how much certain projects cost and determine whether you can budget for them differently, whether it’s using less personnel, cutting equipment or resource cost, or getting them done quicker and more efficiently.
13. Broaden how you accept payment
The more forms of payment you accept the greater likelihood that you’ll get paid on time. Some businesses or individuals are better able to pay with certain methods than others. So if you can accept cash, check, electronic payment, etc., your customers will appreciate your flexibility and you’ll get your payment more promptly.
14. Empower workers to take ownership of your cash flow
Improving cash flow is not just your job as the business owner—it’s the responsibility of everyone who works at your company. If individuals working on the construction or managing the relationship with a particular client prioritize cash flow and you give them the power to do what is necessary to receive payment for a project, then you’ll likely get paid more efficiently than if you tried to manage this whole process by yourself.
15. Increase your prices
It can be scary to raise your prices—but it’s vital that you, at least, consider doing so on a regular basis. Your prices need to reflect the current market rate for your services. If you’re not being adequately compensated for your services, then you’re not going to raise the cash you need to sustain and grow your construction business.
16. Diversify your projects
A great way to bring in more cash is not only by adding more projects—but adding different kinds of construction projects. Perhaps your construction company focuses mostly on large-scale home renovations. While those bring in a lot of money, they may not bring in cash very quickly. So it could be good to add some smaller-scale, shorter-term projects, like bathroom remodeling, that are more likely to provide a quick influx of cash.
17. Diversify your customers
Similarly, you want a variety of customers who pay in different ways and who carry different levels of risk. It can be good to incorporate both individuals and businesses to your clientele list.
18. Conduct background research on clients
You might also want to do some research before agreeing to do business with a client. If they have a history of late payments or being delinquent on their bills, it might not be worth the hassle to engage with them in the first place.
19. Itemize your bills
Depending on how you negotiate your contacts, you could get paid for different parts of a project at different times. If that’s the case, it’s important to monitor and keep track of each aspect of the project and charge for its completion whenever possible. For instance, you could itemize the initial procurement of supplies and charge the customer once everything has been acquired.
20. Pay for advertising
Sometimes, you can’t just rely on word of mouth. Depending on your target audiences, consider advertising on television or in trade publications. You can also sponsor conferences or conventions, or simply make the best of your marketing efforts. Anything you can do to gain exposure will bring you more clients eager to do business.
There are many different ways to improve cash flow for your construction business. Remember that taking out a business loan from Camino Financial can be a great, reasonable way to bring in the cash need for your immediate business needs. Our quick funding process within 4 days after approval will ensure the liquidity of your business in the short term, and the investments you make with the loans can contribute to the long-term growth of your construction company.