Cash flow management is important for the success and sustainability of any business, but nailing it is absolutely essential for construction and trades businesses. Why? Because the industry faces unique challenges. Think lumpy project-based revenue, variable operating expenses, lengthy payment terms, unpredictable project timelines, and the need for substantial cash on hand to pay for materials and labour.
Can you relate? Don’t stress! In this article, we explore essential strategies for effective cash flow management, tailored to the construction and trades sector. We also share some examples of how we’ve helped our clients in this space. Let’s get into it.
Cash Flow Management Tip 1: Accurate Financial Forecasting
To effectively manage cash flow, start with accurate financial forecasting . This involves estimating your upcoming revenue and expenses, taking into account project timelines, payment schedules and seasonal variances. Utilise accounting software or get help from skilled business advisors to help you create realistic cash flow projections .
How We Help Clients With Financial Forecasting
We helped a medium-sized construction client implement accurate financial forecasting. The outcome? By creating detailed cash flow projections for each project, they could better plan expenses and allocate resources. As a result, they reduced instances of overextending their finances on multiple projects simultaneously and could allocate funds more efficiently to high-priority projects. This approach enabled them to increase profitability and minimised the need for expensive short-term loans during negative cash flow crunches.
Cash Flow Management Tip 2: Streamline Invoicing and Payment Processes
Good bookkeeping is super important for tradies and construction companies. Efficient invoicing and payment processes can help deliver positive cash flow. Send out invoices promptly and follow up on overdue payments diligently. Consider offering incentives for early payments or accepting online payments to speed up the collection process.
How We Help Clients With Bookkeeping
Our client, a plumbing contracting company, faced recurring issues with late payments impacting cash position. Our bookkeepers streamlined their invoicing and payment processes, implementing an automated system to send out invoices promptly and follow up on overdue payments. As a result, they improved collections, reducing outstanding accounts receivable and maintaining steady future cash flow. This allowed them to better manage their operating expenses and investments in materials and personnel, ultimately leading to growth and expansion opportunities.
Cash Flow Management Tip 3: Manage Inventory Efficiently
If you’re serious about the growth of your business, you need systems that support it both in the short and long-term. Believe it or not, we often hear from businesses that operate at a loss because they have no visibility on the true costs associated with the manufacturing, storing or shipping of their products. Or, they’re wasting time manually processing orders and using Excel to keep track of stock. Lost orders and slow deliveries ultimately mean a less-than-ideal customer experience.
How We Help Clients With Inventory Management
A roofing contractor recognised they were tying up a substantial amount of money in excess roofing materials. BlueRock’s Digital team helped them implement an inventory management system which allowed them to track inventory levels closely, reduce excess stock, and optimise the ordering process. This not only freed up working capital but also reduced storage costs. With their cash flow improved, they expanded their service area, attracting new clients and increasing revenue.
Cash Flow Management Tip 4: Invest in Project Management and Accounting Software
Good business systems can streamline many aspects of construction and trades businesses. Consider investing in project management software such as WorkflowMax , accounting tools like Xero, and mobile apps that can be used on site to improve efficiency, reduce errors, and save time.
How We Help Clients Implement Business Systems
We helped a general contracting company implement project management software and accounting tools to streamline their operations. By doing so, they improved project planning, monitoring, and cost tracking. This led to fewer costly errors and rework, and they were able to complete projects ahead of schedule, accelerating cash inflow. They could also manage multiple projects simultaneously with greater precision, leading to improved profitability and consistent cash flow.
Cash Flow Management Tip 5: Control Operating Expenses
Trim unnecessary overhead costs wherever possible. Review your office expenses, utilities, and other fixed costs regularly. Eliminating or reducing non-essential expenses can free up cash for essential operational needs.
How We Help Clients Reduce Non-Essential Expenses
Our client, a mid-sized construction firm, was grappling with excessive office-related expenses. After we scrutinised their overhead costs, they downsized their office space, adopted energy-efficient practices, and tightened their purchasing policies. This concerted effort reduced their monthly overheads, allowing those savings to be allocated toward critical areas like equipment investment, hiring skilled labour, and expanding their brand and marketing efforts. By controlling operating expenses, they achieved financial stability and positioned themselves for growth and improved profitability in the competitive construction industry.
Get a Helping Hand Managing Your Cash Flow
Cash flow management is the lifeblood of construction and trades businesses. By taking action in the areas we discussed and staying proactive in your financial planning and monitoring, you’ll build a healthier bottom line and increase opportunities for growth. Remember that cash flow management is an ongoing process that requires attention and adjustment as your business evolves. Talk to our Construction Business Advisory experts today to see how we can help.
