The movement of money between different parties on a construction project is complex. Materials need to be purchased, crews need to be paid, and draws must be consistently submitted by lenders to property owners or GCs. It gets complicated, and the payment cycle has many layers, leading to challenges for subcontractors further down the funnel. For this reason, many contractors struggle to maintain a strong cash flow.
Healthy cash flow is inarguably one of the most important parts of any construction business. By focusing on establishing strong cash flow, construction companies can improve their efficiency in most areas of their business as well. In this article, we’re going to look at how improved cash flow enhances efficiency, and we’ll give you a few tips on how to shore up your own cash flow.
3 benefits of strong cash flow
1. Get materials on-time, every time
Every construction project needs materials in order to be built, and contractors are almost always on the hook for securing their own materials. Contractors who have strong, steady cash flow are able to purchase their materials as needed, and can therefore complete their work on time. Any delay in acquiring materials can slow down the entire project, so making sure that materials are on-site when needed is an essential building block of efficient construction.
A byproduct of being able to purchase materials when you need them without fail is strengthened relationships with material suppliers. Strong relationships with these parties can help contractors secure favorable purchase terms, assure high quality customer service, and can even help with expediting orders in the case that materials are needed in a rush.
2. Keep your crew happy (and productive)
There may be no worse feeling than the impending fear that comes with not knowing how you’re going to pay your crew. Hopefully this is something that many of you reading have not been forced to experience, but anyone that has experienced this, knows how stressful it can be. And if your crew is worried about getting paid, they’re probably not going to be focused on working and building efficiently.
By creating a reliable cash flow, this fear can be eliminated for everyone involved. A company with strong cash flow seldom has to worry about paying its employees, both in full and on time, and is one that is also likely to have motivated workers. Of course, there are still managerial steps that need to be taken to ensure efficient work: proper scheduling, training, management, etc., are all essential here. But having a dependable cash flow is what enables construction companies to fully execute on these other tasks.
3. Improve your credit and handle obstacles with ease
Unexpected delays can absolutely kill the efficiency of any construction project. And while we all know that change orders can come at any time, a construction company’s ability to react to big changes appropriately is strongly correlated with the reliability of its cash flow. The stronger your cash flow, the better you are positioned to react efficiently and effectively.
While having the ability to fund any changes in cash is generally preferred, sometimes it’s not possible. In these instances, drawing on credit may be unavoidable (and even advantageous). Healthy cash flow typically enables strong business credit, which can help construction companies tackle unexpected hurdles more easily and with more favorable terms.
Tips for improving your cash flow
While strong cash flow is essential for growing a construction business and keeping it running efficiently, creating it is often easier said than done. Use these tips to strengthen your cash flow:
- Use financing when you need to: The incremental costs associated with financing are often worth incurring, as it means a smaller upfront payment and the ability to keep more cash on hand. By strategically utilizing financing for materials, equipment, and labor, a construction company’s ability to grow is greatly improved.
- Send preliminary notices: By doing so regularly, contractors can improve the likelihood that they’re paid for their work on time. This can help reduce debt, free up cash for materials, and make sure your crew gets paid on time.
- Implement labor tracking software: Focusing on resource management in general can strengthen cash flow quickly. Labor tracking software allows you to keep track of scheduling and timesheets, monitor the location of your equipment, and much more.
- Take advantage of takeoff and estimating software: Streamlining takeoff and estimating processes (often among the most time-consuming parts of the pre-construction process) can save many hours. Improving efficiency here can help construction companies place more bids, leading to more projects won.
This was a guest submission from Jon Katz, Vice President of Marketing at Billd, a simple payment and finance solution for the construction industry. Jon oversees all marketing activities at Billd.