It’s no secret that owning, operating, and building a construction business can be more difficult to achieve compared to other industries. While accurate tracking of cash flow, inventory, and gross profit margins is key to managing a business, the dynamic and unpredictable nature of construction makes financial management and accounting a critical component to success. No project is identical, so when taking on new jobs, contractors often deal with novel and unexpected conditions that may impact finances. For example, differing risk and safety conditions, work schedule delays, poor weather conditions that halt work, and the possibility of delayed, out-of-spec, or damaged materials, can all have material impacts on a business.
According to the US Department of Commerce, up to 96% of construction and contracting businesses face closure before reaching 10 years in business. Coupled with the reality of heightened interest rates and rising construction costs of today’s economy, each factor can impact profitability and growth, such as insufficient cash flow, loss of organization, and lack of clear processes and decision-making. To overcome the challenges unique to this industry, construction and contracting business owners need well-established accounting practices, up-to-date balance sheets, and digital tools to support strong financial management.
Here are three tips to consider to ensure your business has steady cash flow and is set up for success:
1. Use Data for Real-time Insights
Digital tools can be incredibly valuable in providing business owners with real-time insights that can help you plan and react quickly. Consider technology platforms that can integrate and consolidate all of your data to give you one holistic picture of your business and generate cash flow statements whenever you need them.
AI-integrated analytics tools are also increasingly available through digital platforms, giving businesses access to longer-range scenario planning and more accurate cash flow management based on their business data. Having a clear view of money flows can allow a business to determine whether it's a good time to hire someone, reduce inventory, or improve order accuracy, so your inventory management team only orders what your customers really need or want.
By leveraging real-time data analytics software to consistently review and enhance your cash flow, you can ensure your business remains financially resilient and well-positioned for growth.
By adopting tools and technologies that allow you to view data-backed insights, ensure the business has clear and repeatable accounting processes, and streamline invoicing, you’ll have a clearer picture of the overall financial health of your business.@Kenstocker - adobe.stock.com
2. Digitize Accounting and Billing Processes
Unlike traditional accounting scenarios, where most businesses deal with stable overhead costs and fixed product expenses, construction accounting involves a multitude of direct and indirect costs that require meticulous tracking and allocation to stay on top of cash flow. Money spent on materials, labor, equipment, and subcontractors are all direct costs you’ll see on your expense sheets, while expenses like rent, administration, and quality control are indirect but still important to allocate accurately and bill for.
It's important to have standard, repeatable accounting processes to track both direct and indirect expenses to ensure costs are covered, and clients are billed fairly. Digital accounting solutions can help strengthen existing processes and also help meet the unique needs of the industry by allowing owners to:
- Provide customized charts of accounts with categories like labor, materials, subcontractors, or equipment
- Set up items and services to send an invoice or process a subcontractor bill with ease
- Organize various customers and projects to streamline workflows
- Track time, expenses, and payroll all under one umbrella.
Adaptable accounting software can also offer seamless integration with applications commonly used in the construction industry today. It comes at a lower cost than construction enterprise resource planning (ERPs) while maintaining the flexibility to adapt to the operational needs of the future.
3. Implement Solutions That Support Payment and Cash Flow
Construction businesses succeed when cash flows in as quickly as it flows out. Although increased business volume or larger jobs are a big achievement, they often come with substantial upfront investments in materials, tools, and labor before you can collect a payment from a client. If the work schedule is delayed or a client defaults on the payment, your contractor may not have the cash on hand to complete the job. When issues like this build up over time, it can negatively affect the business in many ways, and in the worst-case scenario, could even lead to bankruptcy. Using tools that facilitate on-time billing and efficient payment collection can mitigate these risks, along with accurate project estimates and a flexible accounting system capable of adjusting to project changes. Here are a few areas to keep in mind during the invoicing process:
- Progress payment systems: Typically, contractors operate on a progress payment system, where monthly invoices are issued based on the percentage of job completion at the time of billing. However, if the initial project estimates are off, invoices may not accurately reflect the project’s actual to-date cost, leading to cash flow shortfalls. What's more, these estimates can trigger disputes between parties, resulting in more payment delays and underfunding.
- Change orders: These are typically needed when project scopes, timelines, or material requirements change, allowing you to adapt to new project specifications while maintaining profitability. While change orders are common, they can also introduce invoicing errors and cash flow challenges. For example, if a team member forgets to update the project estimate after a change order, you’ll risk underbilling for additional work you’ve performed. Ensuring that all changes are documented and approved in writing and applying the new project completion percentage to corresponding invoices is crucial to avoid underpayment.
- Late or inaccurate invoices: It goes without saying that late invoices with errors will cause payment delays. However, client disputes over invoice amounts can also prolong the resolution process, affecting your cash flow. This is where a progress payment schedule can come in handy. Sharing this schedule with clients at the beginning of a job can help manage expectations. Invoicing software and online payment collection methods can also help expedite billing cycles.
Strong financial management and accounting are vital to every construction business, especially given the industry’s thin profit margins and unpredictable job conditions. By adopting tools and technologies that allow you to view data-backed insights, ensure the business has clear and repeatable accounting processes, and streamline invoicing, you’ll have a clearer picture of the overall financial health of your business. Not only will this give you peace of mind, but the real-time data will help you get needed job funding, bond approvals, and much more.
