Cash flow analysis for construction projects is crucial to ensure that the project can be completed without taking on more debt and slowing the process down.
Why is it important to monitor cash flow?
It allows you to use cash available to pay for supplies, payroll and other expenses without needing to take on debt. If you can meet your expenses without additional debt, it reduces project risks and improves profitability.
How can you improve your cash flow?
Create a Budget and Stick to It
Budgeting is one of the most difficult aspects of running a profitable business. If you underestimate costs and demand an upfront payment from customers, you risk running low on cash flow if your budget isn’t accurate.
You need to create a budget and stick to it.
The budget should include:
- Agreements from suppliers on pricing
- Overhead for manhours on the project
- Costs for hiring third-party contractors, such as a plumber or electrician
- Everything necessary to be as accurate as possible
Finally, you’ll want to pad the budget by 10% to 20% because projects can easily go over cost. If you pad the budget, it will help you better account for unexpected expenses, which happen in construction all the time.
Of course, budgets are difficult to devise. You’ll want to get organized so that you can provide an accurate estimate to the customer and budget to internal stakeholders.
Get Organized
Organization is key in construction because small costs can quickly add up. You need a way to stay organized, and it’s best to use a central budgeting system for this process. The system should have the functionality to keep the following organized:
- Documents
- Materials
- Personnel
- Processes
Tracking using the right project management tools can greatly improve cash flow. Inside of your tool, you should allow access to real-time cost data, such as the cost for:
- Labor
- Materials
- Permits
- Etc.
On top of these base costs, you can also keep your agreed price documents available and information about your personnel. You can track whether your head of permitting has filed for the permit or whether the finance team was able to obtain documents from the customer to ensure that they can cover their financial obligations for the project.
Use Project Management Tools
Cash flow analysis for construction projects is possible using the tools that you and your team are already using. For example, cashflow software for QuickBooks can use the data that you already have and begin helping you track cash flow.
However, you’ll also need to use project management tools on top of these financial-related tools.
For example, you may want a tool that offers:
- Bid management
- Accurate project financials
- Design coordination
- Quality and safety logging
- Invoice management
- Real-time visibility
- Connection to contractors
- Workflows
Tools work alongside project managers to help them increase productivity. If you have a more productive team that you can monitor, you can address budget or deadline issues quickly.
Take Advantage of Efficiency Savings by Streamlining Processes
When was the last time that you reviewed your processes? Often, there are hours lost every day to tasks or processes that add no value to the project. You should review these processes to find ways for you to:
- Improve your workflow
- Reduce redundancy
- Save on costs
If you have well-refined processes, you can take advantage of efficiency, allowing you to reduce costs and even finish projects faster.
Implement Policies for Non-standard Costs
Construction is the one industry where costs always seem to be higher than estimates. A major issue with devising a budget for these projects is that non-standard costs arise. Perhaps you’re 80% done with the project and a major, unexpected issue arises that is out of your control.
These non-standard costs must be added into the equation to reach project completion.
One way to tackle this issue is to implement policies for non-standard costs, such as:
- Adding 10% – 20% extra on the cost of the project
- Signing agreements with clients that they will cover these costs
- Asking for payments in integrals based on project completion, such as 25% upfront and 50% when a certain milestone is met
Adding in cash flow monitoring will also help.
Monitor Cash Flow Regularly
If you check your cash flow sporadically, you risk any project going over budget. Instead, you should have tools in place that will monitor your cash flow in real time. Daily analysis will allow you to reduce the risk that a project goes over budget.
Additionally, when these non-standard costs arise, you’ll be able to address them before they swell and become a major issue.
Project managers or whoever is responsible for the project’s budget should have a way to monitor cash flow regularly. In fact, at the start of every day, add checking cash flow into your workflow.
In Conclusion
Project management tools, cash flow management and proper budget estimation will allow you to run a profitable construction company. Over time, if you refine your processes, you’ll improve efficiency and reduce overhead.
