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How to manage cash flow in construction?

5 Answer(s) Available
Answer # 1 #
  • Project Future Cash Flow. It isn't easy to make projections about your future cash flow.
  • Approach Payroll Correctly.
  • Process Change Orders Quickly.
  • Send Automated Invoices Immediately.
  • Accept Electronic Payments.
  • Avoid Over- and Underbilling.
  • Set a Goal for Outstanding Day Sales.
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Saif Heyes
Pathologist
Answer # 2 #

Cash flow is one of the most important measurements in business. It is the amount of money and cash equivalents that move in and out of a business at any given time. Companies that have a positive cash flow have more money than liabilities. This allows them to stay in the black and cover their bills every month. By contrast, those with negative cash flows don't have enough money coming in to fulfill their monthly obligations.

As mentioned above, having a negative cash flow means there may be financial problems for a business and, if not turned around, may lead to the ultimate downfall of the company. Doing this may be challenging, but there are a few strategies construction and contracting companies can employ to go from being in the red to getting back into the black.

It isn't easy to make projections about your future cash flow. In fact, it's a little more complicated in construction than it is in most industries because of the varying degree of jobs and the change orders on current projects. One way to do this is by using cash flow management software. By taking advantage of these tools, construction companies can get a general idea about the income and expenses they expect to see in the future. Proper planning in anticipation of these events will help prevent payroll and payment problems.

Unless you're receiving a steep discount, never use cash to buy your supplies and materials. Instead, make sure you finance these purchases. Many suppliers provide contractors with financing options—credit cards, lines of credit, and loans. Of course, you will be responsible for finance and interest charges. But you won't be out of pocket for the full amount, since you'll have to make regular payments. This leaves more cash on hand for the business to continue operating. And you may even be able to write off the interest and other fees as business expenses.

It's always a good idea to comparison shop between suppliers to make sure you're getting the best price. Every supplier wants your business. If you let them know you’re shopping for the best offer, a supplier is likely to give you the best deal possible, especially if you’re not bluffing and willing to walk away. By reducing costs, you’re freeing up cash.

This situation is different in construction than it is in most businesses. Construction, employees are almost always paid on a bi-weekly basis. To improve cash flow, you can hire subcontractors, which often are paid every four weeks. This should only be done in special situations, however, as you'll get better results from permanent, full-time employees. That higher-quality work reduces the odds of accidents and project setbacks and increases the likelihood of repeat business, referrals, and new clients.

Change orders are common in construction. They’re often the result of a project that requires more time, money, and/or resources than originally thought. Extreme weather also can play a role. The project manager should process a change order immediately, rather than waiting until the project is complete. That money needs to be received quickly, which will positively impact cash flow.

Invoicing can be tedious. But they're an important part of your cash flow. You can definitely write up your invoices by hand, but you'd probably be better off by purchasing software to make your job easier. And remember, all invoices should be automated and sent as soon as possible. If you want to maximize cash flow potential, send invoices ahead of time.

Cash may be king, but make sure your business accepts different forms of payment including electronic payments. This ensures that your business is paid faster, which increases cash flow and allows for more capital to be used for day-to-day operations, payables, and growth.

About 85% of cash in construction comes from project work in progress, which means cash flow performance depends on the project manager’s cash flow management. In addition to training, you can offer an incentive package that's based on cash flow performance. This is likely to be effective.

Some project managers take pride in over-billing. Since this means the invoice will be higher than the job completed to date, current cash flow will increase. The downside is that it will reduce cash flow when the project is complete. Cash flow takes a hit in the near term for companies that decide to underbill their clients. So what's the best option? The best approach is to bill according to how much of the project has been completed.

Having a goal greatly increases the odds of success. The average number of days it takes to get paid in construction is between 60 and 90. Strongly consider setting a realistic goal to reduce that number to 50 days. You can do this by sending invoices immediately, offering payment incentives, writing clear terms, checking credit reports before making any deals, and restructuring terms with non-payers.

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Dialogue: Yasmin
FORGING PRESS OPERATOR I
Answer # 3 #

Cash flow is the amount of cash and cash equivalents that move into and out of a business during a specific time period. It is a key measure of a company’s financial health, liquidity and ability to pay its bills. Positive cash flow indicates that more money is coming into a business than is going out, while negative cash flow means more money is going out than coming in. A cash flow statement captures this information and helps a business analyze its future cash needs.

Net profit and cash flow are two critical measurements of a business’s financial health. Net profit, also known as net income or the “bottom line” (because it appears at the end of an income statement), shows how much profit is left after deducting all expenses from overall revenue during a specific period.

Cash flow is the amount of money moving into and out of a company during the period, reflecting its ability to collect from customers and pay its expenses. Depending on a company’s accounting method, it’s possible for it to be profitable yet have negative cash flow, and vice versa. A company that’s profitable on paper but has negative cash flow can run into problems because it can’t pay its bills on time.

Steady cash flow is crucial in the construction industry, where businesses need cash to fund new projects, keep current projects moving forward, pay for materials and labor and cover other costs. For some construction companies, a few late or missed payments from clients, overstock of inventory or a sudden increase in the cost of materials are all it takes to put them at risk of a cash shortfall — or worse. By monitoring its cash flow, a company can better predict its needs, flag potential problems and ultimately help grow the business. So it’s critical those in construction keep a close eye on cash flow.

At its simplest, cash flow is calculated by subtracting cash outflows from cash inflows. Accountants think of cash inflows as “sources of cash” and cash outflows as “uses of cash.” These inflows and outflows are divided into three categories: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. In other words:

Cash flow = Cash from operating activities +/- Cash from investing activities +/- Cash from financing activities

Operating cash flow reflects payments received from customers less the amount paid to cover operating expenses, such as labor, materials and rent. Operating cash flow relates to a business’s core activities — goods sold or services performed — and excludes non-cash expenses, such as depreciation, amortization and stock-based compensation. The formula to calculate operating cash flow is:

Operating cash flow = Net income + Non-cash expenses + Change in working capital

Investing cash flow reflects money spent on long-term or capital investments, such as the purchase (or sale) of equipment and property (capital expenditures), stocks and bonds or another company via acquisition. Analyzing this activity to see whether cash movements are consistent or one-time occurrences provides management with a better view about the “quality” of cash flow. For example, a sale of old construction equipment might provide a nice inflow of cash, but is that the best way to fund payroll? The formula to calculate investing cash flow is:

Investing cash flow = Purchase/sale of capital expenditures + Purchase/sale of marketable securities + Purchase/sale of a business or division

Financing cash flow includes any funding from a company’s owners, investors and creditors relating to debt, equity and dividends. Scrutinizing financing cash outflows may reveal opportunities for better loan terms, and cash inflows from issuing debt can help alleviate temporary cash crunches. The formula to calculate financial cash flow is:

Financing cash flow = Issue/repurchase of debt + Issue/repurchase of equity + Payment of dividends

A cash flow analysis explores all the activities on a cash flow statement to determine how much money a company has available to pay its expenses. The analysis starts by generating a cash flow statement, often with the help of accounting software, that includes detailed information for each of the three categories of cash flow mentioned above: operating, investing and financing. When the results of these three categories are added to a company’s beginning cash for the period, a company can see its ending cash position, better understand the current state of the business and make operational changes for the future, as appropriate.

Identifying the underlying cause of each cash flow change can help a business identify ways to improve cash flow and highlight potential drains. However, analysis is key: Negative cash flow over a sustained period of time would typically be cause for alarm, but it doesn’t mean a business lacks for cash in the short term. In fact, negative cash flow may be a sign of long-term investments meant to grow a business. It may also be expected for seasonable businesses such as construction and is offset, with proper management, by periods of high positive cash flow. Similarly, a company can have positive cash flow yet not be profitable or have significant debt.

Construction firms require a steady, positive cash flow in order to finance projects, pay workers and grow their businesses. A cash crunch in one project can cascade to other projects. Late paying customers are one reason for a shortfall, but ineffective accounting processes and unpredictable events, such as changes in labor and materials costs, can also set a company back. Construction companies that understand these common issues are better positioned to improve their cash flow.

Positive cash flow is important for every construction business. It enables a company to cover its expenses in the here and now, begin new projects — which come with significant associated costs — and grow the business. Effective cash flow management is critical. Here are some strategies that can help improve cash flow.

A company’s cash position is subject to frequent fluctuations and is best monitored and managed by accounting software. A solution like NetSuite’s cloud financial and accounting system includes billing and invoicing management, access to real-time metrics and overall visibility into a company’s cash flow and cash position. In addition, NetSuite Project Accounting automates and manages project invoices to reduce delays and monitoring project profitability metrics, so they’re completed on time and within budget.

Construction businesses need to continually fill their cash coffers in order to fund new projects, pay their expenses, including materials, labor and operating costs, and ultimately grow. But in an industry that typically operates on thin profit margins, sometimes a single slow-paying customer is all it takes to flip a company’s cash flow from positive to negative. Understanding the issues that can hamper cash flow, employing strategies that can boost cash flow, and using software to manage and monitor cash flow and billing can keep a construction business in operation for a long time.

How do you calculate cash flow in construction?

At its simplest, cash flow is calculated by subtracting expenses (outflows) from income (inflows) for a specific time period. In the construction industry, where projects are often paid incrementally as a company finishes different stages of work, staying on top of cash flow is especially important given the frequent flow of cash in and out of the business.

How do you use cash flow in a construction company?

Positive cash flow allows construction companies to pay their expenses on time. But money going out requires money coming in, so a business must be vigilant about billing consistently and accurately, avoiding over- and underbilling. Determining the best way to fund new projects, with cash or through financing, and purchasing fixed assets like equipment also depend on the amount of cash flowing into the business.

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Answer # 4 #

Cash flow is one of the most important measurements in business. It is the amount of money and cash equivalents that move in and out of a business at any given time. Companies that have a positive cash flow have more money than liabilities. This allows them to stay in the black and cover their bills every month. By contrast, those with negative cash flows don't have enough money coming in to fulfill their monthly obligations.

As mentioned above, having a negative cash flow means there may be financial problems for a business and, if not turned around, may lead to the ultimate downfall of the company. Doing this may be challenging, but there are a few strategies construction and contracting companies can employ to go from being in the red to getting back into the black.

It isn't easy to make projections about your future cash flow. In fact, it's a little more complicated in construction than it is in most industries because of the varying degree of jobs and the change orders on current projects. One way to do this is by using cash flow management software. By taking advantage of these tools, construction companies can get a general idea about the income and expenses they expect to see in the future. Proper planning in anticipation of these events will help prevent payroll and payment problems.

Unless you're receiving a steep discount, never use cash to buy your supplies and materials. Instead, make sure you finance these purchases. Many suppliers provide contractors with financing options—credit cards, lines of credit, and loans. Of course, you will be responsible for finance and interest charges. But you won't be out of pocket for the full amount, since you'll have to make regular payments. This leaves more cash on hand for the business to continue operating. And you may even be able to write off the interest and other fees as business expenses.

It's always a good idea to comparison shop between suppliers to make sure you're getting the best price. Every supplier wants your business. If you let them know you’re shopping for the best offer, a supplier is likely to give you the best deal possible, especially if you’re not bluffing and willing to walk away. By reducing costs, you’re freeing up cash.

This situation is different in construction than it is in most businesses. Construction, employees are almost always paid on a bi-weekly basis. To improve cash flow, you can hire subcontractors, which often are paid every four weeks. This should only be done in special situations, however, as you'll get better results from permanent, full-time employees. That higher-quality work reduces the odds of accidents and project setbacks and increases the likelihood of repeat business, referrals, and new clients.

Change orders are common in construction. They’re often the result of a project that requires more time, money, and/or resources than originally thought. Extreme weather also can play a role. The project manager should process a change order immediately, rather than waiting until the project is complete. That money needs to be received quickly, which will positively impact cash flow.

Invoicing can be tedious. But they're an important part of your cash flow. You can definitely write up your invoices by hand, but you'd probably be better off by purchasing software to make your job easier. And remember, all invoices should be automated and sent as soon as possible. If you want to maximize cash flow potential, send invoices ahead of time.

Cash may be king, but make sure your business accepts different forms of payment including electronic payments. This ensures that your business is paid faster, which increases cash flow and allows for more capital to be used for day-to-day operations, payables, and growth.

About 85% of cash in construction comes from project work in progress, which means cash flow performance depends on the project manager’s cash flow management. In addition to training, you can offer an incentive package that's based on cash flow performance. This is likely to be effective.

Some project managers take pride in over-billing. Since this means the invoice will be higher than the job completed to date, current cash flow will increase. The downside is that it will reduce cash flow when the project is complete. Cash flow takes a hit in the near term for companies that decide to underbill their clients. So what's the best option? The best approach is to bill according to how much of the project has been completed.

Having a goal greatly increases the odds of success. The average number of days it takes to get paid in construction is between 60 and 90. Strongly consider setting a realistic goal to reduce that number to 50 days. You can do this by sending invoices immediately, offering payment incentives, writing clear terms, checking credit reports before making any deals, and restructuring terms with non-payers.

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Glendyn Ronstadt
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Answer # 5 #

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Durga Bhaduri
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