Steady construction cash flow is vital for subcontractors due to the nature of their work. The majority not only start projects on spec, but also tend to be paid after the work has been completed—running out of cash could mean a halt in production, missed payroll, a drop in profitability, or even financial ruin.
To run a business successfully and continue to produce good value for customers, subcontractors need to manage their construction cash flow. Here are some tips on keeping your business in the green…
Why is construction cash flow important?
Here are some reasons having healthy construction cash flow is vital:
- Paying your employees on time (if you have staff)
- Purchasing materials or equipment and paying for other business necessities (e.g., advertising, utilities, site maintenance)
- Steady construction cash flow puts you in good standing with banks and other creditors, which is good to get loans
- Having funds to fall back on in the event of a late payment
15 ways subcontractors can keep their construction cash flow healthy
There are several steps subcontractors can take to help manage their construction cash flow. These include knowing when and how to say “no” to projects, staying organized, establishing a line of credit with their bank, working with suppliers who give them better terms, and more.
1. Get organized
Keeping your spending under control is a critical part of managing your cash. Make a budget, forecast what expenses need to be paid and what materials and supplies need to be bought—and when. Once you identify what you need, you may be able to buy in bulk to enjoy lower prices and shipping costs.
2. Create a forecast
What’s in your schedule, and how much work can your business realistically take on? Are there leads you should follow up on? Setting a sales objective and planning jobs ahead of time will help prevent a scramble to find work in a lull and keep money coming in.
3. Prioritize
Advance consideration means you can prioritize certain projects or customers over others. Prioritizing higher paying customers or those who pay early helps protect your bank account—and maintain good relations with your best clients.
4. Market your business before you run out of work
It’s easy to get tied up in paid work, but marketing your business is essential and shouldn’t be neglected. Invest a little money and time in making sure new business has a way to find you. Your website, business cards, and brochure are all good starting points for reaching new clients, so invest in these essentials to keep cash flowing in. If you have the funds available, take out an ad or two in local publications. This is another great way of drumming up new business.
5. …but don’t let marketing stop you from getting jobs done
There is only so much time in a day. The search for new clients must not consume time and energy at the cost of completing projects for paying customers. After all, you can’t send a bill if the job isn’t done.
6. Be flexible
Find a balance in your scheduling so you can occasionally take an emergency project without causing a backlog in your operations. Having the agility to take advantage of a last-minute opportunity can mean a nice bonus at the end of the month.Flexibility also helps you switch lanes if a project is unexpectedly delayed or postponed.
7. Communicate with your clients—let them know what to expect and when, and when payment will be due
If you’re falling behind, let your clients know: a missed deadline may not be so bad if you’re transparent. Project management subcontractor software allows subcontractors to stay on top of every aspect of each project so everything runs smoothly, communication with your clients is transparent, and expectations are met.
8. Manage scope
When we’re keen to impress a client, it can be tempting to think that going above and beyond is a good idea. Putting more resources into projects than what had been planned and budgeted for is detrimental to your working relationships, and your bottom line. It sets unreasonable expectations for the long term. Ensure that the scope of your projects is clearly laid out, and renegotiate if necessary.
9. Have a backup plan
Risk—and the ability to successfully manage it—is an important part of being a subcontractor. Be proactive and don’t let any problems stop you from completing projects.
- If possible, have funds set aside
- Have peers on call as a backup
- Be prepared if something goes wrong and you can’t complete the project, or if a payment is late
10. Maintain accurate expense records and send invoices as soon as work is completed
Making sure you invoice promptly will ensure that payment comes through as quickly as possible. It’s best practice to keep receipts and invoices for every expense you incur as a subcontractor. Having documentation of all expenses helps ensure everything is in order when tax time comes.
11. Get paid in advance whenever possible
Payments are key to avoiding late fees or bounced checks. One way to do this is by offering a discount for early payment. For example, 3% off if you’re paid within 5 days of the invoice being sent out. When there is an opportunity, ask the client if you can be paid upfront.
12. Keep track of your time
Keep track of the resources you spend on each project so that when invoicing your client at the end of a project there’s no confusion about what tasks and materials were included. You can also use this data as a way of speeding up your workflow and identifying the tasks that take the most time.
- Remember to establish dates in your contract
- Use project management tools to track milestones and run daily reports
13. Establish a line of credit with your bank
Some owners will require their subcontractors to establish a line of credit with their bank. Generally, this is not more than one month’s fee. This can be useful for subcontractors who are working on several jobs at the same time; if they need some extra cash immediately, they can borrow it against future payments of invoices they’ve already submitted.
14. Negotiate better terms with your suppliers
Don’t be afraid to negotiate, especially if you’re a loyal customer. Many suppliers will extend credit for large projects with guaranteed payment and may offer discounts for volume. The same goes for insurance, utilities, and other services: shop around for the best deals, and ask—don’t rely on them to offer you the best price.
15. Use tools that make construction cash flow management easier
Keeping your accounts in a centralized platform makes it easier to reconcile and achieve financial success: real-time updates and notifications help make sure nothing slips through the cracks, while automated invoicing eliminates time-consuming admin and costly mistakes.
eSUB’s project management platform is built especially for subcontractors. It seamlessly integrates with accounting software so you can manage your construction cash flow better while minimizing errors. It also works on your mobile, so you can track construction cash flow on the go and stay up-to-date.
If you’re interested in using construction management software to improve your construction cash flow, and more, schedule a demo to learn how eSUB can help.
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