Construction needs to get serious about cash flow visibility
- Construction businesses facing economic uncertainty benefit from clear cash flow visibility to avoid fronting costs, retroactive decision making and cash left sitting on their books.
- Greater insight around cash flow helps construction leaders to better manage costs, adapt to changing market conditions or rising prices and base strategic decisions on forecasting built with real-time data.
- To gain greater cash flow clarity, work with an advisor to identify your specific needs or gaps, adjust your processes or systems when necessary and make cash flow a topic of conversation for not just your financial team, but your C-suite.
As the construction industry battles interest rates, supply chain challenges and rising costs, maintaining a healthy cash flow is more essential than ever. But too many construction businesses lack the visibility needed to do this properly.
Construction leaders are stuck making decisions based on slow reporting, with CFOs forced to look backward at historical data rather than focusing on real-time analysis and future cash flow forecasting. This leaves businesses missing opportunities and even vulnerable to an unexpected cash crunch.
Keep reading to learn more about how you can change that.
Why do construction firms need more cash flow visibility?
The construction business has slowed down significantly over the past year. As a result, firms that developed bad habits around cash flow management — or simply lack the systems and processes to track cash movement in real time — have thinner margins for error with which to operate.
Here are some more details on key cash flow issues in construction:
- Constricted decision-making: Slow cash flow reporting means that decision makers are forced to react to yesterday’s news rather than think more proactively based on up-to-date financial models. This makes it harder to adapt to changing conditions or identify risks.
- Fronting materials and supply expenses: Lagging billing cycles and manual reporting make it harder for you to identify your cash position for each project. This can leave you forced to purchase materials and supplies with your own money rather than using client funds to cover those costs from the beginning.
- Cash left on books: Without clear visibility, you run the risk of not just a shortage, but cash left sitting around on your books rather than being put to good use. Too much of this is typically not a good thing for your business.
- Subcontractor payments: General contractors that don’t understand their cash flow may find themselves on the hook for fronting not just supply purchases, but also payments to subcontractors.
How do construction companies benefit from clearer cash flow visibility and better forecasting?
More cash flow visibility strengthens your business and helps you navigate uncertainty. If you know where your money is and where it’s going next, you can make smarter decisions, adapt to changing circumstances and spot risks before they become major problems.
Make proactive decisions
Greater cash flow clarity allows your finance team to build more accurate financial models and do better forecasting. This gives you the ability to make more proactive decisions, rather than basing your strategy around historical data from last quarter.
Better manage project costs
Understanding your cash flow can help you avoid getting caught in a cash crunch where you’re forced to pay out of pocket for supplies or subcontractor expenses you haven’t yet billed your client for. You’ll also be better positioned to avoid cost overruns if you have clearer real-time data on spending around your individual projects.
Adapt to changing conditions
Being able to track your cash flow in real time helps you notice right away if your spending patterns change so you can make adjustments as needed. You’ll also be better positioned to jump at opportunities like an M&A or navigate a slowdown.
Quickly flag risks
Flag issues like slow customer payments, tax liabilities and cost overruns sooner, as well as de-risk downstream vendor or subcontractor payments (which should be funded by slow pay customers before it impacts those relationships). More visibility helps you to spot risks well ahead of time rather than only finding out once a problem or even a full-blown crisis is already at hand.
How should your construction firm achieve greater cash flow visibility?
Gaining the proactive decision-making, adaptability, and cost management benefits of cash flow visibility starts with adjusting your existing processes or systems. Here are five steps to consider:
1. Make cash flow a C-suite issue
Many firms keep cash flow conversations siloed within the financial team. But your leadership should also be invested here. Encourage your CFO to discuss cash flow with the rest of your executives to help create buy-in around the value of visibility and making adjustments as needed.
2. Collaborate with an advisor
Find an external advisor who can help you learn more about how cash flow in the construction business is changing. Work with your advisor to understand what peer firms are doing and how you may need to adapt in order to keep up based on your specific goals, challenges and opportunities.
3. Assess your current cash flow capabilities
Understand how much visibility you have right now. That way, you can determine where you’re falling short and how to begin making improvements to deliver greater understanding and clarity around where your money is going.
4. Modernize systems and processes
You may or may not need to make targeted technology upgrades so your systems can monitor your cash flow in real time. But you will likely need to adjust your current processes, including moving to 13-week rolling forecasting models and driver-based forecasting, to help you get more agile.
Also key: upgrading your accounts receivable processes to use segmentation, early payment incentives or other strategies to boost liquidity and avoid fronting costs for your clients. Make sure you have favorable collection terms in your contracts and favorable payment terms with your vendors and subcontractors to ensure you are collecting before you have to pay vendors or subcontractors.
5. Connect cash flow to strategy
As your visibility increases, you should use that information to guide your strategic decisions and potential performance incentive programs throughout the organization. For example, if an aspect of your business is consistently cash negative, you’ll be able to see that and consider whether you should make changes.
Cash flow visibility can also make you more attractive to investors or deal partners, creating new growth possibilities that were previously closed off to you. And cash flow metric incentive programs can help your project management teams stay engaged beyond the project execution stage and through to the end, ensuring complete billing and collection.
How Wipfli can help
We help construction businesses use cash flow visibility to fuel growth. Let’s talk about your goals and whether enhanced systems, processes or outsourced financial talent could help you achieve them. Start a conversation.
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