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Avoid These Common Construction Industry Cash Management Mistakes

Construction industry finance management can be a challenging task. Unpredictable events related to weather, unforeseen changes in subcontractor availability, and unexpected construction supply price increases can have detrimental effects to cash flow and ultimately the bottom line.  Balanced cash flow is an important indicator of a business’s overall well-being. In order to ensure your construction business maintains a healthy cash flow, avoid these common construction industry cash management mistakes.

  • Ignoring Seasonal Changes: Many industries experience peak seasons as well as slow times. This is especially true of the construction industry, where weather can impact project starts in certain climates, operational costs can increase during good market conditions due to investments in new equipment and supplies, and cash reserves can be depleted as a result of customer credit extensions until a project is complete. Because of these factors, construction businesses are particularly prone to cash flow fluctuations. By understanding what causes these fluctuations, you can take measures in advance to ensure your business is prepared.
  • Letting Your Fixed Expenses Get Too High: Fixed expenses can quickly erode cash reserves. Close monitoring of monthly spending and keeping these expenses down will help to sustain your cash reserves.
  • Limiting Your Focus to an Income Statement: While it does reveal sales, expenses and profits at any given moment, income statements do not provide you with insight into your company’s cash flow. Instead, analyze cash-flow statements, which will allow you to see what cash is left over at the end of the month, as well as how much cash came into the business and how much cash left the business during a given time period. Regular forecasting of cash flow is critical to successful cash flow management and will reveal much about the financial viability of your construction business.
  • Maintaining a Lengthy Cash Flow Cycle: Cash flow problems in the construction industry are often due to cash flow cycles that are too long. Time lags between billing and collection of receivables coupled with having to make payments to suppliers and subcontractors before receiving payment can result in business failure if ignored. Cash flow planning is critical to compressing the cash flow cycle. Using strategies like accurate project planning, scheduling payments by due date, issuing payment requisitions on a timely basis, and planning the way a job will be billed before it starts will help to ensure your cash flow cycle supports the success of your business.

While many construction companies focus on profitability as a measure of business success, cash flow is equally as important. Avoid potential problems with cash flow management through effective cash flow planning to avoid these common mistakes.

Did you know FACTOR KING® operates a construction finance division? With revolving credit lines totally 60 million dollars annually (based on 30 day roll overs), FACTOR KING® can help your construction company bridge the gaps in your cash flow by advancing up to 80% of the value of your invoiced receivables. The remaining 20% (minus fees) is paid once we collect the actual receivables. Turn your invoices into immediate cash flow by applying today!

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