With pandemic assistance coming to an end—such as the Paycheck Protection Program (PPP) and Employee Retention Tax Credit (ERC credit)—that boosted cash flow for many construction companies since 2020, cash management strategies need to be revisited and refreshed to ensure your company takes the right steps to improve liquidity and strengthen its bottom line.
Paying attention to cash flow is especially important as the pressures of inflation affect wages and material costs, the market’s volatility, and supply chain issues.
Projecting cash flow in the construction industry can be especially complicated because, unlike many industries, cash flow doesn’t always follow revenue recognition. As revenue is recognized over time, most often measured by the percentage of the job that’s complete, revenue is recognized ratably as a project progresses.
However, if you’re able to invoice for more than the work completed—referred to as overbilling—or, alternatively, only able to invoice for a portion of the work completed—referred to as underbilling—your cash flow will be out of sync with your revenue recognized. As a result, it’s important to understand both the revenue recognition and related cash flow needs of each project.
Construction companies often see business cash flow trapped in several areas:
Take the following steps to proactively boost your cash flow.
Though it’s impossible to predict unexpected events, having potential solutions in place as a safeguard could help cushion their financial impact.
Contract provisions around unforeseen events should be considered during the drafting phase.
Many aspects related to cash flow management in construction are dependent on a project’s operations, but operation and financial components of a company are often segregated.
Open lines of communication and strong working relationships between finance and operations teams are important to keep them in step and prepared for the unexpected.
Effective communication of job progress on the operations side can help identify potential cash drains, or to ensure that jobs can be billed appropriately.
This may require assessing company functions from a comprehensive perspective to fix any issues and maintain a strong operational culture.
The more closely finance and operations work together, the more accurate regular cash flow forecasts can be, making it more manageable to use time and resources efficiently.
Tracking which jobs have positive cash flow and which jobs need more attention can help the bottom line.
Successful companies build an innovation-driven, improvement-oriented culture. Tracking relevant key performance indicators (KPI) can assist in decision-making, help you set strategic objectives, and allow you to evaluate your business processes in real-time.
Invest in data analytics technology that can create user-friendly dashboards that make KPIs easy to track and interpret. Construction companies aren’t traditionally early adopters of technology, but these tools can help management drive timely and informed decision-making to improve the bottom line and cash flow.
Potential KPIs to include:
Construction companies may also want to track KPIs that are often more closely associated with project management. Establishing and monitoring project management KPIs can help improve the bottom line and cash flow.
Potential KPIs to track include the following.
Leadership is responsible for setting safety as the highest priority and upholding the expectation that safety is taken seriously by everyone involved. Accidents happen when hazards go unreported or unidentified. A reporting process that identifies hazards to mitigate or even eliminate them not only protects your employees, but also increases productivity and trust as well as avoids costly accidents.
Further, an effective safety program should always link back to education and training for your employees.
Measuring quality can be tricky as these metrics may change depending on the type of project. Quality metrics usually also involve internal quality metrics such as timeline and budget, and external quality metrics such as client satisfaction. But quality metrics are essential for decreasing the time wasted on reworks or changes.
It’s important to understand how your team spends their time and effort to ensure deadlines are met. Carefully tracking performance and productivity can help you discern if you need to allocate additional resources to the job or take some away to increase efficiency and meet project goals.
Recent factors caused by the pandemic increased construction material shortages and price volatility, forcing many contractors to rethink their inventory management infrastructure. In uncertain times, it’s important to effectively track material supply to ensure project deadlines are met. Tracking metrics around material supply can also help you determine if you need to look for new suppliers or storage sites.
It’s not enough to gather the data; you must interpret it, too. The goal is to implement an intuitive, easy-to-use financial and operational dashboard that draws the user towards what’s important—selecting a few actionable KPIs is more effective than listing all interesting performance indicators.
Budget managers should feel empowered to answer their own queries through use of data visualizations and dashboards KPIs should be viewed in context:
Once you identify KPIs and benchmarks and develop some comparable scenarios and intel, the real value building begins by analyzing what actions will create measurable change in your cash flow management approach.
While every construction organization is different, some common macro-level areas of focus include measurables that enhance profitability through revenue and cost intelligence, reductions in organizational risk through capital management, and the increase of profitable growth.
When cash is in short supply, don’t wait for the situation to resolve itself. Companies need to act quickly and look for places where cash has been trapped.
Maintaining a strong relationship with your bank is also important should you need to draw on a line of credit to resolve the problem.
Don’t be afraid to have tough meetings and hold your team accountable if problems arise in specific areas. This may require a cultural and operational mindset shift within the company to address recurring issues.
The impacts of the COVID-19 pandemic have been tough for many businesses. Explore additional construction business consulting resources like how to implement new technology, how to access additional tax benefits, and more.
For more questions about cash flow management, contact your Moss Adams professional or visit our Construction Practice.