4 ways to prevent cash flow issues in the construction industry
Since the beginning of the pandemic, the construction industry has been hit hard by lack of skilled labor, fragile supply chains and rising material costs. Yet there’s hope as the industry is expected to continue growing this year. But to do so, contractors must face one of the biggest challenges – maintaining a healthy cash flow.
What’s cash flow and why is it important?
Cash flow is the balance of money coming in and out of your business at any given time. Cash flow takes into account not just earnings, but also loans or investments. So, you can have positive cash flow, even if you’re spending more than you’re earning.
Having positive cash flow means you have enough money to pay for supplies, vendors, and subcontractors while still having extra cash for unexpected expenses or for growing your business. Maintaining positive cash flow gives your business more resilience during uncertain times.
So, what are some cash flow issues the construction industry faces?
No advance payment
The bid for any project includes the cost of materials, planning, and labor. However, the contract often doesn’t include any advance payment requirements. So it’s the contractor’s responsibility to carry the full cost of getting the project off the ground.
Paying bills early
Paying for materials, equipment, and subcontractors early is smart. However, paying before you get paid—which could sometimes be only after the job is done—can lead to negative cash flow.
Because construction projects are huge and costly, they’re managed by several people and companies. When you work on a project with others, their behavior affects how and when you get paid.
As projects take a long time to finish, various costs may rise before they’re complete. For example, the price of glass increased by 20% between early 2020 and July 2022.
Covid-related shutdowns, lack of working hands, and other factors created material shortages and price increases. 75% of construction firms reported delays due to longer lead times or shortage of materials. Yet many contracts didn’t take these things into consideration and so the advance payment was lower than needed.
Not using the right project management tools, not having an experienced project manager, or not having a PM at all can lead to subcontractors showing up after they are needed, and of course, budget issues.
4 ways for construction professionals to solve cash flow issues
1. Choose the right payment and delivery method
When you pay invoices and get paid with Melio, you can choose payment and delivery methods that help you better manage your cash flow.
- Pay with a credit card. This allows you to defer payments and buy more time. Your vendors get paid on time, while the payment is deducted at the end of your next billing cycle. When using Melio, If your vendors want a check of bank transfer, they get it that way and you can still pay with a credit card.
- Get paid by ACH bank transfer. When using Melio to get paid by your business customers, you can receive payment directly into your bank account. Instead of dealing with cash or paper checks–and the chances of fraud–you get peace of mind knowing the payment will go where it needs to. You can also track every invoice from the minute it’s generated.
2. Use accounting software to follow your numbers closely
Accounting software like QuickBooks help you keep your books in check. Melio works with QuickBooks Online so that your payments and accounting can all be done from the same place.
3. Have a credit policy
A credit policy is a document with guidelines that sets payment terms for customers. In construction, where a lot of the payment is done in different stages, a credit policy can be as important as insurance.
Create incentives for early payments, limit the amount and time for payments on specific accounts, and create a procedure for dealing with delayed payments.
Always, always, always work with written contracts. Make sure the payment terms you give clients are shorter than the terms you have with your vendors. Add a clause for materials’ price increases and certain delays.
Harness the power of technology
While the construction industry is prone to cash flow issues, take these actions to make sure your business’ finances stay healthy. Using digital payment tools that give you the ability to choose different payment methods can make your business stronger no matter the weather.