How to Effectively Manage Construction Cash Flow

If you run a construction business and want to win and complete bigger construction projects, you need to manage your cash flow effectively. This skill is critical for the long-term viability of any construction company – particularly ambitious, growing businesses.

The capital-intensive nature of construction, coupled with the complexities of project management and work in progress (WIP) accounting, creates a uniquely challenging environment for maintaining healthy cash flow.

If you don’t navigate it well, you may suffer project delays, strain your relationships with suppliers and subcontractors, and place your finances—and your business as a whole–at risk. Checking how much cash you have in the bank might work for a small, residential construction firm. But if you’re working on larger projects, proactively forecasting and managing cash flow is key to your success.

Maintain Accurate Financial Records

Maintaining accurate financial records is the foundation of effective cash flow management.

Having accurate financial records enables you to understand your company’s financial position at any given time. This includes tracking obligations such as debt and accounts payables, which directly impact cash flow. If your records are inaccurate, your decision-making can suffer due to bad data, placing your finances in distress.

So how do you maintain consistent, accurate financial records? It starts at the top.

Companies whose leadership prioritizes accurate record-keeping and cash flow management are generally better positioned for success. Executive attitudes toward financial management play a significant role in establishing a culture of proactivity and fiscal responsibility.

Keep Diligent Cash Flow Projections

One of the most effective tools for managing cash flow is your cash flow projection spreadsheet. This spreadsheet should detail your current and future obligations and your estimated inflows and outflows. While these projections are estimates, they help you anticipate the company’s future cash position and plan accordingly.

To maximize the impact of your cash flow projections, make sure to incorporate project timelines, payment terms and average collection periods. These details provide a more accurate picture of when cash will be received and when payments will be due, allowing for better planning and decision-making.

Prioritize Work in Progress (WIP) Accounting

Work in progress (WIP) accounting is foundational to construction accounting. It allows your firm to receive revenue (and collect payments) as progress is made toward the completion of a project. This in turn helps you understand how much to invoice and when to do so.

Having a skilled accountant on hand with a thorough understanding of WIP accounting and related processes is essential. They’ll need skills like:

• Job costing
• Percent complete accounting
• Estimating future cash outflows

Inaccurate WIP accounting can lead to cash flow problems and project overruns. Without the right approach, it’s easy for costs to overrun or for you to fall behind on billing.

Incorrect revenue recognition can distort a company’s financial statements and lead to poor decision-making. If a company recognizes revenue prematurely or fails to account for project costs correctly, the project may appear more profitable than it actually is.

Monitor Accounts Receivable and Payables

Monitoring receivables and payables aging is critical to cash flow management because it enables you to accurately understand and manage how much money you expect to have at any point.

To effectively manage receivables, implement processes for timely invoicing, set clear payment terms and ensure consistent follow-up on overdue accounts. This may involve:

• Automating invoicing processes
• Establishing dedicated accounts receivable personnel
• Standardizing escalation procedures for delinquent accounts

While it’s best to collect your receivables promptly, the opposite is true when it comes to payables. Taking advantage of extended payment terms for payables can provide a strategic cash flow buffer. Paying subcontractors and suppliers late will weaken your relationships. But if you can negotiate favorable payment terms, it can be extremely helpful from a cash flow perspective.

Construction Cash Flow Management Best Practices

To effectively manage your construction cash flow, align your processes with best practices tailored to the size and volume of your projects.

These best practices include:

• Monthly WIP schedule updates: Regularly review and update your project schedules to track progress and identify potential delays or cost overruns.
• General ledger reviews: Conduct monthly reviews of your general ledger to ensure accurate financial reporting and identify and resolve any discrepancies.
• Cash flow projections: Prepare and maintain cash flow projections for the next 6-12 months. Incorporate project timelines, payment terms, and average collection periods, and update these projections when necessary.
• Regular monitoring: Implement a system for regular review and monitoring of cash flow, such as weekly or bi-weekly meetings to discuss project progress, receivables and payables.

As your construction company grows and takes on larger, more complex projects, it’s crucial to scale up your accounting functions to match the increased demands. This may involve outsourcing or hiring additional personnel, implementing more sophisticated accounting software, and establishing more rigorous cash flow management processes.

Maintaining a consistent and disciplined approach to cash flow management is crucial, regardless of your company’s size or project volume. Assess and adapt these practices regularly to ensure they align with the company’s growth and evolving needs.

Expand Your Resources with Outsourced Accounting Expertise from James Moore

For many construction companies, leveraging outsourced expertise from firms like James Moore can be invaluable in managing cash flow effectively. This allows you to access relevant, high-level accounting expertise and scale your resources along with your growth without the added burden of hiring internal staff.

James Moore’s construction CPAs and advisors offer monthly or quarterly consulting services. These consults incorporate regular reviews, strategic guidance, and training to bridge internal knowledge gaps and upskill your accounting team.

Our construction accounting advisors bring specialized expertise in areas such as WIP schedules, percent complete accounting and cash flow projections. With their extensive industry knowledge, they can identify potential problems early and provide strategic guidance to mitigate risks.

Start a conversation today to discuss your company’s construction cash flow with a construction CPA from James Moore.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.