What You Need to Predict Weekly Cash Flow for Construction
Predicting cash flow for your construction business can be tricky.
Cash flow is the amount of money moving into and out of your business, and managing it effectively is essential so your company can pay employees on time, make equipment lease payments, and cover ongoing expenses.
Cash flow management is vital for any business. However, considering the nature of the construction industry and how projects can span over months or even years with customer payments received incrementally, construction businesses must be on top of cash flow so projects aren't stalled or cancelled.
Before we get ahead of ourselves though, it is crucial to ensure the accuracy of three essential elements for your accrual-basis company to predict cash flow. These items include ensuring accurate accounts payable and accounts receivable and establishing bank feed connections.
Let's discuss why these things must be set up properly first and solutions for fixing related problems so your construction business doesn't run into cash flow issues.
Accounts Payable Workflow
Your accounts payable data lets you know the outstanding balance you owe creditors, vendors, and other parties.
Examples of balances on your company's accounts payable include subcontractors, materials, leases, insurance, utilities, etc.
You need to make sure you have enough money on hand to make these payments timely so your business can continue operating as scheduled. If you are behind on subcontractor payments or have yet to pay for materials, it can have a spiral effect, delaying projects and causing damage to your company's reputation.
Some common challenges construction companies face with their accounts payable are duplicating or entering inaccurate data from invoices, not properly accounting for payment due dates, relying on manual data entry, or not having a dedicated staff to handle the financials.
Despite these challenges, there are steps and safeguards you can take to avoid mistakes or correct them going forward.
Consider utilizing accounting software to automate payments, record invoices, and manage data. Software can help reduce errors from manual entry and help track upcoming due dates so payments are not late or missed.
Hiring an accounting or bookkeeping staff to manage the finances can also minimize errors arising from individuals being overextended or lacking financial training.
Accounts Receivable Workflow
Whereas accounts payable reflects what your company owes to other parties, accounts receivable tracks the outstanding amounts other parties owe your company.
Accounts receivable for a construction company typically consists of amounts owed from project clients.
Since payments are collected as projects progress, it is common for your business to carry a large accounts receivable balance. However, issues may arise when amounts are not collected promptly, causing downstream effects and delays in payments you need to make to others.
Common mistakes companies make when it comes to their accounts receivable include not providing clear payment terms to customers, failing to either timely invoice or collect from customers, or offering credit to customers without properly vetting them first.
Luckily, these are all issues your company can easily address to ensure accurate accounts receivable data and improve cash flow.
Having clear and understandable payment terms and communicating those terms to customers will reduce customer confusion and delays. This is especially important in the construction industry, given the potentially extended intervals of time between payment due dates or requirements of completed project milestones necessary for invoicing.
If terms are not effectively stated or communicated with customers timely, they may not be focused on or cognizant of their payment obligations.
To ensure invoices are sent to customers promptly, you may want to consider implementing accounting software to help automate your process and implement regular system follow-ups.
Finally, performing credit checks before extending financing options to untrustworthy customers will help reduce the risk of customers potentially defaulting and reducing bad debt.
Bank Feed Connection and Auto Pay Transactions
The final obstacle to overcome before accurately predicting cash flow is setting up a bank feed connection and implementing auto-pay transactions. Bank feeds connect your bank account directly to your accounting software and report transactions to the software on a regular basis. This tool helps increase visibility regarding amounts coming into your business and what you are spending.
Implementing a bank feed is essential to manage your business's cash flow effectively. Without bank feeds, companies waste valuable time manually entering data into software and increase the potential for data entry errors. In addition to saving time and reducing errors, bank feeds also provide timely information, increase transaction visibility, and provide a centralized data hub so all your transaction data is stored in a single place. If your company hasn't set up a bank feed yet, they are generally easy to set up and straightforward to use.
In addition to implementing a bank feed connection, automating your payment process can also help improve your cash flow management. It's common for businesses in the construction industry to have recurring amounts due to third parties.
Common examples include rent amounts, lease payments, and utilities. By implementing auto pay for these recurring transactions, you can ensure you make payments on time and reduce the possibility of missing payments and incurring late fees.
With auto-pay, you can typically choose when to pay amounts so you can configure a payment schedule conducive to your business.
Need Help Predicting Your Cash Flow?
If you're concerned about your company's cash flow projections, take a step back and consider other potential factors. Ensure your accounts payable and accounts receivable are accurate, set up a bank feed connection, and enable auto-pay for recurring transactions to start. Consider following our tips to ensure your data is correct and your processes function smoothly.
If your company requires assistance with any of the items we discussed, we're here to help. At Atlas Accounting Group, we specialize in helping construction companies identify issues to enhance cash flow projections. Don't wait for cash flow problems to surface. Reach out to us today to proactively address issues and prevent cash flow challenges.
