Many small construction companies use inadequate accounting practices to manage cash flow. This ranges from haphazard paper filing systems to, at best, using a part-time bookkeeper. Fluctuations in material prices and other economic factors in the construction industry mean it takes careful planning, foresight, and management of pricing, estimates, and billing procedures to generate a healthy profit in a construction business.
So, unless these “systems” are super-reliable, your business could be vulnerable to construction cash flow problems.
According to a recent industry report of accounts receivable and days sales outstanding, nearly 20% of general contractors receive payments 60-90 days late. While late payments represent one key problem in maintaining a positive cash flow, properly handling negative cash flow issues now can avert future financial disaster.
Modern software (like ServiceTitan) can streamline the entire construction cash flow process in three important areas that help construction companies:
Accounting: Establish essential, basic accounting procedures to set your construction business up for success.
Estimating: Create accurate, profitable estimates based on a reliable pricing model.
Invoicing: Manage, automate, and track invoicing and payments dynamically to bring cash in swiftly.
In this post, we’ll share eight cash flow management tips and explain how our software, ServiceTitan, helps construction businesses manage all aspects of construction cash flow (including estimates, pricing and invoicing) efficiently, and minimize cash shortages.
Tips for Managing Construction Cash Flow
Find out more about how ServiceTitan could help you manage your construction cash flow by signing up for a free demo here.
Construction Cash Flow Challenges
Before we dive into our tips, here are some of the most common issues that hurt cash flow and cause construction companies financial problems:
Undercharging for new projects: This seems basic, but if you don’t charge enough for a construction project to make a profit, you’ll fail before you’ve even arrived at the construction site.
Using an unreliable pricing method: Guesstimating prices and not having an accurate and up-to-date pricing model is likely to result in misquoting, undercharging, or even overbilling for jobs. Aside from hurting your cash flow, inaccurate estimates look unprofessional to customers.
Mismanaging job costing and change orders: Not keeping a handle on job costing and change orders throughout a project (and adapting accordingly) will likely lead to costly mistakes and delays.
Paying bills early: While it may seem sensible to pay bills as they arrive, this can leave you short of cash. Pay bills on their due date.
Working without an upfront payment: Typically, it requires capital to get a construction project off the ground (such as expenses for materials and equipment). If you don’t ask for an advance payment to cover some of these costs, you could run into cash flow issues.
Retainage issues: It’s common for customers to withhold a portion of the payment (a retainage) until a construction project is complete and the customer is satisfied. This could cause a cash flow issue if not properly budgeted.
Billing customers late: If you don’t send out your invoices promptly, the money coming in will be delayed. This is especially so if you’re invoicing a lump sum at the end of a job.
Late payers: As we mentioned earlier, 20% of contractors are paid up to 90 days late. Customers paying invoices late (or not at all) has a significant, negative impact on cash flow.
Not tracking metrics: If you don’t have dependable accounting procedures and reporting systems, you have no way of monitoring the critical financial and performance metrics of your business. This is almost certain to hurt your cash flow.
All of these are important but can be boiled down to one overarching directive — if you’re charging enough to make a profit and managing cash inflows and outflows efficiently, then your cash flow should be healthy.
Our tips will help with all of the above, and more.
Tip #1: Establish Stringent 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.
For example, if you don’t produce a monthly cash flow statement or you don’t have a process for requesting upfront payments for materials and equipment to offset project expenditure, cash flow could spiral out of control.
Bill Powers, a budget and planning expert who now teaches those best practices as ServiceTitan’s Senior Industry Advisor for Customer Experience and R&D, says, “There are a lot of contractors out there, even in this day and age, who run their businesses out of their checkbook. Just because you have money in your checkbook doesn't mean you're profiting. You need to make sure that you're looking at your balance sheet and watching your cash flow, because it will change depending upon the season you're in.”
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 software enables business owners to drill down into the progress of each construction project. Real-time data displays project cost variances and at-a-glance percentages of the budget used. The software integrates with QuickBooks, Sage Intacct, and Viewpoint Vista accounting software for accurate, seamless reporting to eliminate manual errors.
Tip #2: Create Cash Flow Forecasts
Calculate billing schedule and payment terms
Use construction management software
Forecasting allows you to predict future cash flow and safeguard the overall health of your construction business.
Powers says, “Any cash flow projections also need to include a fixed asset schedule, so you know which assets, such as your company’s trucks, need to be sold or replaced, and when.”
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 project cash flow. This means calculating and strictly following your billing schedule and payment terms, so you can cover your expenditures 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 proportional to the size of contractor and project, but it’s 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 provide the knowledge to make the right financial decisions for your company.
Tip # 3: Build Estimates for Profit and Manage Job Costings
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 job-site 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 potential issues and includes greater attention to detail.
ServiceTitan’s software lets you create detailed construction estimates where you can requisition materials directly from the estimate, and upload photos to the project to share with customers. Project managers can build estimates using your most up-to-date equipment and material pricing (see tip #4), as well as your current inventory.
Our project-tracking page provides at-a-glance details for tracking project costs, as well as initiating key actions, such as changing the scope of the project, ordering materials, creating purchase order documents, and invoicing.
Unlike standalone estimating or accounting software, ServiceTitan uses all the information included in the estimate as a starting point for the rest of the construction project.
As well as issuing estimates from the office, construction managers can create estimates via a mobile device. Photos, manufacturer videos, and product info can all be accessed in a couple of taps so that estimates can be produced on the construction site, and signed off in minutes.
You can read more about ServiceTitan’s estimating software in this post.
Manage Job Costing
An important follow-up from estimate creation is keeping track of costs as each project progresses to ensure there are no financial hiccups or delays (in both the short-term or as you’re nearing closeout).
With ServiceTitan's job costing software, you can accurately measure budgeted versus actual costs using real-time data synced from inventory, contractors on-site, and payroll.
At-a-glance features show the contract amount and percentage of contract revenue obtained, as well as percentage of completion so you can keep up-to-date on multiple projects and improve cash flow management and overall profit.
Learn more about managing your project costs in this post.
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Tip #4: Use the Right Pricing Model
Charge flat-rate or hourly
Use contractor payroll software
Different pricing models can affect 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 unless the job takes longer than anticipated.
Hourly pay enables you to track exact working hours, then bill upon completion in phases. Charging hourly relies on everyone keeping detailed records of all work carried out which is time-consuming. There is also no incentive for your employees or subcontractors to work quickly and efficiently.
Some construction companies choose to use another method and hire trusted subcontractors, instead of budgeting employee pay and benefits.
Further reading: Flat Rate vs. Hourly Pricing for Contractors
As mentioned in tip #3, creating accurate estimates relies on having up-to-date and accessible pricing information. ServiceTitan’s integrated flat-rate solution, Pricebook Pro comes loaded with curated content including detailed descriptions and manufacturer images and allows you to set your construction company’s markups and labor rates.
It also lets you set up and apply discounts and run a report to show the company’s gross payout for a specific payroll period.
ServiceTitan’s contractor payroll software allows employees (and subs) to approve timesheet accuracy, eliminating any potential pay discrepancies.
Our timesheet software helps you monitor time spent on specific activities, such as driving and collecting materials, as well as time spent on actual work, so you can manage the productivity of your business. These details are recorded in real-time, while overtime and bonuses can be configured easily, too.
Tip #5: Handle Change Orders Efficiently
Follow set protocol
Document all changes
Help retain a profit with accurate project management. Project managers always should follow a 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.
Changes can be logged and managed within the ServiceTitan project management software and will filter through to the relevant features that the change affects, such as billing and scheduling.
For example, if there is a problem with the supply chain of materials which will delay the project, this can be logged within the software and the project schedule will adjust accordingly. Your team can contact individual contractors and customers via SMS so it’s easy to make sure everyone is aware immediately — whether the job needs to be lengthened or rescheduled altogether.
Tip #6: Automate Invoicing
Maintain a billing schedule
Invoice direct from the construction site
Staying on top of details can be difficult in the midst of multiple projects, but maintaining a proper billing process and payment schedule directly affects cash flow.
There’s little point in carefully creating accurate estimates and following pricing guides if you send out an invoice late. And, if you use a part-time bookkeeper, you lose precious time waiting until they’re next in the office so an invoice can be generated or a late payment chased.
Likewise, construction businesses that don’t use modern software like ServiceTitan rely on project managers and subcontractors to compile all of this information (e.g. labor, time, and materials) to create each invoice. This is hugely time-consuming.
ServiceTitan's software automatically does this 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.
Note: If you already use accounting software, ServiceTitan’s invoicing software can be integrated with QuickBooks, Sage Intacct, and Viewpoint Vista so you can ensure all your accounting and billing processes are streamlined and accessible.
With ServiceTitan’s Invoice Generator tool, invoices can be generated directly from the construction site. Simply input the relevant information into a customized invoice template and send it to the customer via text or email. This speeds up the payment process and benefits your cash flow.
Tip #7: Offer Flexible Payment Options
Offer customers alternate ways to pay
Include financing options
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 a timely payment.
With ServiceTitan, you can offer customers flexible payment options by check, credit card, cash, or financing. Your construction manager or subcontractors can take payments directly from customers via their mobile device or send the customer a link to a personalized payment portal where they can pay. This method is preferred by customers and means that your invoice is paid quickly.
Offering financing options to your customers via ServiceTitan is very lucrative. You control which plans you offer and set the rules to suit your business, and ServiceTitan will automatically do the calculations so jobs can be closed more quickly.
Tip #8: Track Metrics
Monitor revenue trends
Compile stats with real-time data
If you have no method of monitoring key metrics and cash flow over a period of time, you won’t know if your construction business has enough cash to operate profitably.
You can track revenue by day, week, or month, and compile meaningful statistics in real-time. Tracking metrics via ServiceTitan’s dynamic dashboard enables you to filter dozens of KPIs, identify areas for growth, and gauge progress.
Accurate data assessment is crucial for monitoring your construction company’s cash flow and becomes a key component as you plan for company growth.
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.
Learn more about KPIs and tracking metrics in the ServiceTitan Playbook.
Ready to Try ServiceTitan to Manage Your Construction Cash Flow?
Keeping on top of cash flow is a significant challenge for construction companies. Modern software like ServiceTitan can streamline the entire construction cash flow process so that you can set up essential accounting procedures, create profitable estimates based on a reliable pricing model, and manage and automate billing to speed up money coming into your construction business.
Find out more about how ServiceTitan could help you manage your construction cash flow and help you run your entire construction business by signing up for a free demo.
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.