November 18, 2022
Properly managing cash flow is essential for Atlanta contractors and construction companies. It provides the funding needed to start new projects, maintain existing ones, and pay for material, supply, labor, and other expenses. Concurrently, a strong financial position can help manage weather-changing economic conditions. With an expected decrease in new 2023 projects driven by rising interest rates, it’s essential to revisit cash flow management strategies. Implementing best practices now will permit the company to be in a strong position and prepare for the unexpected. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.
The tricky part about construction cash flow is that it’s not linear. It can take months to realize any profit from a contract. Federal legislation like the Infrastructure Investment Act has helped bolster future projections, but it’s still a long process to see the true benefits. Continued spikes in material prices, labor shortages, interest rates, and a looming recession are holding the industry back.
“With borrowing costs likely to increase during the coming months and material prices set to remain elevated, industry momentum could easily downshift further in 2023,” said Associated Builders and Contractors (ABC) Chief Economist Anirban Basu. Yet, he went on to say that this projected forecast may be “overly pessimistic” and industry expectations remain overwhelmingly positive.
Matching cash flow and operational needs continue to be challenging, however. On average, it takes 83 days for contractors to receive payments. Subcontractors face even longer delays in many cases. The inability to balance cash flow can be the difference between a company that remains in business and thrives and one forced to shut down.
A good place for construction owners and executives to start is knowing the difference between cash flow and profit. While profit is the difference between what it costs to deliver a project and the products and services to make that happen, cash flow is the net cash and cash equivalents that flow through a business in each period. If there are more expenses than income, there’s a negative cash flow. Too many periods of negative cash flow, and the company is either losing money or needs to improve the timing of income and expenses or both.
A proactive cash flow analysis can help a company see where each project will incur costs, how much, and how to manage these outlays with a usually longer payment lead time. There’s no single right answer, but there are a few areas of improvement to explore.
Cash Flow Optimization
There are several layers to construction cash flow management, and not all of them are obvious. In this industry, activities that occur on and outside the job site are just as important to cash flow as financial activities.
Contract Management
Before a project starts, construction companies can ensure the contract factors in delays, project timelines and payment schedules, relief for damages, suspension of work and termination clauses, claim deadlines, and more.
Measuring Quality
Subpar construction jobs are riskier. Lower the risk (and the threat of poor-quality work eroding profitability) by measuring quality indicators, like project defects, rework efforts, the first-time pass rate of inspections, and customer satisfaction, and comparing the completed project with original estimates and specifications.
Inventory and Materials
The cost and availability of materials introduce substantial risk to any construction project post-pandemic. Tracking supplies can help construction contractors manage inventory needs, costs, supplier network, and off- or on-site storage.
Cash Flow Forecasts and Projections
This also goes hand in hand with measuring the right key performance indicators (KPIs) for the business. Common financial KPIs in construction are net income, average accounts receivable aging, monthly overhead burn rate, working capital, bonding capacity, and bid development. But tracking more than just financial KPIs is essential to gain a well-rounded understanding of the business. KPIs may vary from one company to the next, so deciding what to focus on can help to benchmark and measure performance and progress.
Safety Culture
A job well done is also where employees and contractors go home safely each night. Instilling a culture of safety as the top priority not only helps with retention, job satisfaction, and productivity, it also avoids unnecessary costs and liabilities. KPIs to track include the overall safety or incident rating, the number of accidents or incidents, how frequently training occurs, and the rate of safety-related incidents.
It’s also wise to maintain transparent communications and strong relationships with customers, vendors, suppliers, and other stakeholders. In an uncertain environment, effective communication with parties that trust each other can go a long way in preventing serious cash flow problems.
Performance and Productivity
Tracking these two KPIs can help to measure the resources needed to complete jobs and whether those resources are being deployed well or not. It’s about meeting the project goals with efficiency, safety, and quality. Metrics to track include average project revenue per hour worked, average amount of downtime, and the labor turnover rate.
Where to Focus
These are several areas where construction companies can work to improve their cash flow.
Contact Us
Regularly reviewing cash flow management strategies is a best practice that should be conducted regularly. This is even more important during times of economic uncertainty. If you have questions about the information outlined above or need assistance with an accounting or tax issue, Wilson Lewis can help. For additional information, call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.