Are you struggling to meet monthly business costs? Do you often make late payments?

If so, these are clear signs it’s time to improve your cash flow.

Without action, your construction business risks damaging relationships with suppliers, disrupting the project timeline, and decreasing the profit margin.

So what does great cash flow management look like? It involves taking proactive steps such as strict bookkeeping, detailed backup plans, and strategic contractual arrangements.

To help your business achieve its full potential, our experts at Doxa have created this complete guide to cash flow management in construction.

Keep reading for valuable cash flow insights!

Understanding Cash Flow Management in Construction

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What is Cash Flow Management in Construction?

Cash flow management is the tracking of the timing and amount of money coming in and out of your project.

Cash flow is ‘positive’ when more money is coming in than going out, and cash flow is ‘negative’ when more money is going out than coming in.

In the context of construction, cash flow refers to an analysis of when cost will arise and the total amount.

A healthy cash flow is important for the survival of a construction company.

This is because: a positive cash flow signals sufficient funds to complete a project, while a negative cash flow signals insufficient funds to keep the project running.

Therefore, cash flow management strategies in construction help to forecast whether there is enough funding throughout the project lifecycle (i.e., excess income, shortfall).

Types of Cash Flow in Construction

Here are the three types of cash flow in the construction industry:

1. Cash Flows from Operations (CFO)
Operating cash flow refers to cash flows from day-to-day operations, like goods sold and services delivered.

It showcases the ability of the company to pay bills and operating expenses.

Examples of CFO include rent, payroll, and income tax payments.

2. Cash Flows from Investing (CFI)
Investing cash flow represents the amount of cash generated or spent from investment activities within a specific timeframe.

Examples of CFI include purchase and sale of fixed assets such as cranes and forklifts.

3. Cash Flows from Financing (CFF)
Financing cash flow refers to the cash flows that are used to fund the business and its working capital.

It provides insights into the efficacy of capital management and long-term viability.

Examples of CFF include dividend payments and stock repurchases.

Early Signs of Cash Flow Problems

How do you know if your business has an “unhealthy” cash flow? Look out for warning signs such as:

• Late payments from clients.
• Insufficient material and equipment.
• Substantial overhead expenses.
• Funds are moved around to cover costs.

Benefits of Consistent Cash Flow Management in the Construction Industry

1. Stronger Financial Stability

Consistent cash flow management provides a clear picture of financial health, enabling construction firms to maintain stability.

By closely monitoring cash inflows and outflows, companies can better anticipate periods of low cash availability and plan accordingly.

This stability reduces the risk of insolvency and allows firms to navigate economic fluctuations more effectively, ensuring that they can meet financial obligations without disruption.

2. Better Budgeting and Resource Allocation

Effective cash flow management facilitates more accurate budgeting.

By analysing past cash flow patterns and forecasting future income and expenses, construction companies can allocate resources more efficiently.

This leads to better planning for labour, materials, and overhead costs, helping to avoid budget overruns and ensuring that all aspects of a project are adequately funded.

As a result, projects can proceed smoothly without financial hiccups.

3. Timely Project Completion

Consistent cash flow allows construction firms to have the necessary funds available when they are needed most.

Timely payments to subcontractors and suppliers ensure that materials are delivered on schedule and that work continues without delay.

This proactive management of cash flow can significantly enhance a company’s reputation for reliability and efficiency, leading to repeat business and positive referrals.

4. Improved Supplier and Subcontractor Relationships

Maintaining a consistent cash flow enables companies to pay suppliers and subcontractors on time.

Timely payments build trust and strengthen relationships, which can lead to more favourable terms, such as discounts or priority service.

Strong relationships can also result in more flexible arrangements during challenging times, giving firms a competitive edge when negotiating contracts or securing materials.

5. More Investment Opportunities

A well-managed cash flow demonstrates financial health and stability, making it easier for construction companies to attract investment or secure financing.

Lenders and investors are more likely to support businesses that can show a reliable cash flow history, as it indicates lower risk.

This access to capital can be crucial for scaling operations, taking on larger projects, or investing in new technologies.

Challenges in Cash Flow Management

Here are a few cash flow challenges every construction firm may face:

Inaccurate Forecasting

One of the most significant challenges is the difficulty in accurately predicting future cash flows.

Construction projects often involve numerous variables, such as weather delays, changes in project scope, and fluctuating material costs.

These uncertainties can lead to miscalculations in expected income and expenses, resulting in cash shortages.

Inaccurate forecasting can hinder a company’s ability to meet financial obligations and plan for future projects effectively, making it crucial to continuously update cash flow projections based on real-time data.

Delayed Payments from Clients

The construction industry frequently deals with payment delays from clients, especially in larger projects where invoices can be processed slowly.

This delay can create significant cash flow gaps, impacting a company’s ability to pay suppliers and subcontractors on time.

The challenge is compounded by the fact that many contracts include lengthy payment cycles, which can leave firms in a precarious position.

To mitigate this, construction companies need to establish clear payment terms and actively follow up on outstanding invoices to maintain cash flow stability.

Variable Project Costs

Construction projects often encounter unexpected costs due to factors like design changes, site conditions, or regulatory requirements.

These variable costs can strain cash flow, especially if they arise after budgets have been set and financing secured.

Companies must be prepared for these fluctuations by maintaining contingency funds and regularly reviewing project budgets.

This proactive approach helps absorb unexpected expenses and minimises their impact on overall cash flow.

High Initial Capital (Overhead) Requirements

Many construction projects require significant upfront capital for materials, labour, and equipment.

This initial investment can create cash flow pressure, especially if a company lacks sufficient working capital.

Firms may find themselves in a challenging position where they need to fund ongoing operations while waiting for client payments or project milestones.

To address this challenge, construction companies can explore options like short-term financing or establishing credit lines with suppliers to ensure they have the necessary funds to cover initial costs without jeopardising cash flow.

Related Article: The Procurement Process Flow: How to Make It Better in 2024

How to Manage and Improve Your Construction Company’s Cash Flow

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To overcome cash flow problems, our experts recommend to:

Implement Accurate Cash Flow Forecasting

Developing a reliable cash flow forecast is crucial for anticipating future cash needs and identifying potential shortfalls.

To create an accurate forecast, construction companies should analyse historical data, project timelines, and payment schedules.

Regularly updating the forecast with real-time information, such as changes in project costs or client payment delays, helps ensure it remains relevant.

By forecasting cash flow on a monthly or even weekly basis, companies can make informed decisions about spending and investment, allowing for better planning and resource allocation.

Establish Clear Payment Terms and Follow Up on Invoices

Clear payment terms outlined in contracts can significantly enhance cash flow management.

By specifying payment schedules, milestones, and late fees, companies can set expectations with clients upfront.

Once the work is completed or a milestone is reached, timely invoicing is essential.

Implementing a system for regular follow-ups on outstanding invoices can help ensure that payments are received on time.

Automated reminders or dedicated accounts receivable personnel can streamline this process, reducing the time between invoicing and payment, and improving overall cash flow.

Maintain Strong Relationships with Suppliers and Subcontractors

Building and maintaining strong relationships with suppliers and subcontractors can lead to more favourable payment terms and greater flexibility during cash flow crunches.

Open communication about financial situations can encourage suppliers to offer extended payment terms or discounts for early payments.

Additionally, strong relationships can result in priority service, ensuring that materials are delivered on time without disrupting project schedules.

By fostering a collaborative environment, construction companies can create a support network that enhances cash flow management.

Utilise Technology for Financial Management

Leveraging technology can significantly improve cash flow management in construction.

Accounting software can automate invoicing, track expenses, and generate real-time cash flow reports.

Project management tools can help monitor budget adherence and alert managers to potential financial issues early on.

By using these technologies, companies can gain insights into their financial health, streamline processes, and make data-driven decisions that enhance cash flow.

Additionally, mobile applications can enable on-site teams to capture expenses and report progress immediately, improving accuracy and efficiency.

Looking for a solution that ticks all these boxes?

Doxa Connex is a procurement, payment, and financing platform built specially for contractors, sub-contractors, and suppliers.

From automating procurement workflows to improving spend visibility, our software helps you manage project cash flows with ease.

The best part: Doxa Connex boosts the efficiency of existing systems by integrating seamlessly with your ERP and accounting systems.

Related Articles:

• Why ERP Isn’t Enough for Construction Payment Management.
• The 6 Best Construction Procurement Software In 2024 

Achieve Consistent Cash Flow With Doxa Connex

The key takeaway: Cash control is a vital component for business success.

Enter Doxa Connex – a premier platform connecting buyers, suppliers, and financiers effortlessly.

Built on a strong enterprise-grade foundation, our highly flexible platform allows us to constantly add, improve and enhance features and workflows, especially for the construction industry.

To provide the best value for buyers, we’ve partnered with leading financial institutions including Maybank, UOB, OCBC, and more.

Our platform is trusted by prominent players in the construction industry such as Tiong Seng Group, Kimly Construction, and Sim Lian, creating a thriving ecosystem for growth.

Interested to see how Doxa Connex unlocks the full potential of your cash flow? – Book a Demo Today!