The profitability of any individual construction project depends on effective management of construction material costs and labor. On a larger level, effective cash flow will ensure that your company can meet all its financial obligations and stay in business. Here are some suggestions for managing cash flow that can help you manage this crucial area of your business.
- Check out potential clients: The larger the project, the more important it is to know your potential clients. Perform some due diligence to find out their creditworthiness and how they’ve managed their financial relationships with other firms. Ask for a financial statement, check credit ratings, or get references from other contractors who have worked with them in the past.
- Negotiate the best terms: Before starting a project, make sure you’ve negotiated the best contract terms possible. Terms should include not only payment amounts but payment terms and schedules. The contract should include information on who is responsible for what costs and when supplies and materials are paid for. Make sure you and your client understand the contract and that both of you sign the contract to indicate agreement.
- Conduct cash flow analyses and projections: Create a realistic and well-reasoned cash flow projection for the project. Estimate project costs such as materials, labor, subcontractor payments, and related costs. Determine the amount of work that can be completed each week and month to give you an idea of how much can be billed each cycle. Compare your estimates to actual expenditures to help improve your forecasting and estimating skills.
- Maintain your payment and collection schedule: After establishing a payment schedule, ensure your client sticks to it. Maintaining regular collection processes will ensure your cash flow stays consistent.
- Avoid unprofitable projects: If your estimates show that a project will not be profitable, don’t even submit a bid. Staying busy is not the same as staying profitable.
For more tips on how to manage cost flow on your construction projects, contact Construction Monitor. We are a leading firm for construction information and updates on housing and industry trends.