Cash Flow Problems and How To Manage Them

Construction and design firms frequently experience cash flow problems. It’s the nature of the business. However, careful planning can help identify small problems before they become bigger, and adopting several simple cash management strategies can help your business manage and control cash flow.

Common Causes of Cash Flow Problems

The causes of cash flow problems are many. For example, when contractors pay suppliers and subcontractors before they receive any payment from the owner of the project they are working on, a cash crunch can result. Retainage and labor-intensive work are among the most common reasons that contractors run into cash flow problems. Other practices that can lead to cash shortages:

• Maintaining excessive inventory
• Using cash to buy equipment instead of leasing or financing these purchases
• Allowing large gaps between the time it takes to bill and the time it takes to collect receivables 
• Using available cash for outside investments or for advances or loans to officers
• Improving Cash Flow Planning

Proper cash flow planning helps contractors make better use of budgets, employ financing and capital more effectively, increase revenues and boost profits. To analyze cash receipts and disbursements, contractors must know when the work on varying aspects of a project will be performed. This timeline can be used in conjunction with the contract to map out expected cash flows related to the project.

Cash Outflow Strategies

If a contractor’s bills aren’t paid on time, creditors may demand that future purchases be paid for in cash. Interest and penalty charges on unpaid balances can quickly compound.

Contractors can better control cash outflows by implementing an automated accounts payable system to organize payments by due date. Unless they receive an early payment discount, contractors should pay bills when due and not before.

It may be possible to negotiate with key suppliers for longer payment terms. In addition, contractors experiencing cash flow problems should review existing bank loans to see if they might be restructured under better terms.

Cash Inflow Strategies

Ideally, contractors should be able to generate up-to-the-minute information on the status of each outstanding account. Project managers should have reports that show due dates for project progress payments. The reports should include the date the last bill was sent, the date the last payment was received, the current balance and, when required, the number of days delinquent. Managers should contact customers soon after payment is due to determine why payment has been delayed and to obtain a schedule from the customer that indicates when payment will be made.

Contractors should also focus on collecting retentions. It’s important to develop and implement procedures to complete punch-lists, as-built drawings, owner’s manuals and other submittal requirements. Once this information is made available, a contractor is better able to push for the release of funds from the project agency or owner. It’s important also to stay on top of the status and aging of retentions to ensure that your firm’s collection and mechanic’s lien rights are preserved. (Mechanic’s lien laws vary from state to state.)

Delays in collecting payments for work performed can weaken a company’s working capital position. Without adequate working capital, a contractor may not be able to take advantage of opportunities that become available.

Cash flow management is essential if a business is to survive and thrive. We can help you examine your current cash flow procedures to identify areas that may need improvement. Please contact us.