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In the construction industry, it’s no secret managing cash flow can be tricky. With rising material pricing and other economic factors, it takes knowledge, planning, and oversight to generate a healthy profit in the construction business.
According to a recent industry report of accounts receivable and days sales outstanding, nearly 30 percent of general contractors receive payments 30-60 days late. While late payments represent only one issue in maintaining a positive cash flow, properly handling negative cash flow issues now can avert future financial disaster.
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Establish Accounting Procedures
Follow best-practice procedures
Closely monitor each job’s progress
To accurately monitor incoming and outgoing cash, a construction company must be highly organized and follow best-practice construction accounting procedures.
Create and communicate clear procedures at the start of projects and follow them throughout. During each project, stay on top of accounts payable and accounts receivable with a construction cash flow chart, following protocol in managing retainages and change orders.
ServiceTitan’s Cloud-based Construction & Service Software enables business owners to drill down into the progress of each construction project. Real-time data displays cost variances and at-a-glance percentages of the budget used. The software integrates with QuickBooks or Sage Intacct accounting software for accurate, seamless reporting to eliminate manual errors.
Create Cash Flow Forecasts
Calculate billing schedule and payment terms
Use construction management software
Forecasting allows you to predict future cash flow, and ensures the overall health of your large or small business.
For each project, conduct a construction cash flow analysis to help predict shortfalls or surpluses. An analysis of how much money you will need, and when, guides your budgeting so you can better calculate your cash position. This means calculating and strictly following your billing schedule and payment terms, so you can cover your expenses and fill in any gaps.
Structure billing payments with more frequent, smaller milestones to maintain a constant influx of money, recommends Silvio Dobrovat, President of Hometelligent in the San Francisco Bay Area.
“If you’re running multiple projects and they all have micro-milestones, then you’re constantly getting paid,” Dobrovat says.
Breaking up a large phase needs to be proportionate to the size of contractor and project, but is appropriate for multiple, larger-scale projects in the $200,000 range, he says. For example, in a new house build, you could break up the foundation phase into three milestone payments for forms, rebar, and pouring.
With ServiceTitan’s construction management software, a construction cash flow projection template tracks profit on every phase of the job by comparing cost to revenue and spotlights margins in dollars and percentages. Cash flow projections for construction projects provides the knowledge to make the right financial decisions for your company.
Charge For Profit
Bid on profitable projects
Create accurate estimates from past projects
A company’s cash flow problems can result from underbidding or underbilling. Make sure your company bids on profitable projects by submitting accurate estimates with pricing that covers your costs and grows profits.
Tracking past project budgets creates more accurate estimates and bids for future projects. Necessary calculations include jobsite labor, materials, equipment costs, overhead, and profit margin.
Clearly outline the scope of a project so clients understand what costs include. Depending on the type of project, clients may be willing to pay more if they see your proposal considers all the issues and includes greater attention to detail.
Strategize for growth by determining your company's niche and seek out jobs that fit your profit-generating model.
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Use the Right Pricing Model
Charge flat-rate or hourly
Use contractor payroll software
Different pricing models can impact your company’s profit. Depending on what type of work your company performs in the construction industry, you may choose to charge flat-rate or hourly pricing.
Flat-rate pricing means your company charges the customer a set price for a specific job, regardless of how many hours it takes to complete. A flat rate could mean more profit and reward your employees for high performance. Hourly pay enables you to track exact working hours, then bill upon completion in phases.
Contractor payroll software allows employees to approve timesheet accuracy, eliminating any potential pay discrepancies.
Some construction companies choose to use another method and hire trusted subcontractors, instead of budgeting employee pay and benefits.
Manage Change Orders
Follow set protocol
Document all changes
Retain a profit with accurate project management. Project managers always should follow set protocol for change orders, because delayed approval costs time and money.
Ensure clear communication and accurately track change orders by documenting extra work, estimated cost, and any related scheduling changes. Stay proactive, even when dealing with change orders, to keep the project going and cash flowing.
Although a construction company owner cannot calculate every unknown, examine as many variables as possible and find ways to eliminate cash flow issues. Experts in the construction industry recommend choosing the right suppliers and shopping around for the best prices. Some experts recommend using credit instead of cash to buy materials in order to delay payment, unless you can obtain an early payment discount from vendors. Sometimes you may receive upfront customer payments, increasing your positive cash flow.
Maintain a billing schedule
Offer customers alternate ways to pay
Staying on top of details can be difficult in the midst of multiple projects, but maintaining a proper billing schedule directly affects cash flow—no invoice, no money.
Stay on top of accounts receivable with ServiceTitan's automated construction software, which does the work for you. It enables you to set a billing schedule based on job progress, so you know the proper time to bill and any remaining balances owed based on job progress or project phase.
Reduce late payments by providing an incentive for early payment or spreading payments into smaller, more frequent installments. Offering more than one way to pay makes it easier on your customers and increases the chances of timely payment.
Monitor revenue trends
Compile stats with real-time data
Track metrics and key performance indicators so you know your company's working capital and overall financial position.
ServiceTitan’s Cloud-based reporting software allows you to track revenue by day, week, or month, and compile meaningful statistics, all in real time. Tracking metrics enables you to identify areas for growth and gauge progress.
By tracking the metrics that mean the most to your company, you can choose jobs based on the greatest profitability—and boost your company’s bottom line.
ServiceTitan is a comprehensive software solution built specifically to help service companies streamline their operations, boost revenue, and substantially elevate the trajectory of their business. Our comprehensive, cloud-based platform is used by thousands of electrical, HVAC, plumbing, garage door, and chimney sweep shops across the country—and has increased their revenue by an average of 25% in just their first year with us.