The Secret to Better Cash Flow for Construction Contractors

Ask most contractors what they’re worried about this year. They’ll probably mention supply chain problems, high material costs and labor shortages as most anxiety-inducing triad at the top of the list. But underlying all those issues—and tying them all together—is one of the most fundamental concerns for any contractors business: cash flow. After all, cash is the lifeblood of a healthy contracting operation, and if it stops flowing, it can be fatal.

But on the flip side, contractors who master the art of maintaining positive cash flow are better positioned to weather the short-term challenges mentioned above, and continue to thrive and grow, even in adverse circumstances.

The good news is that it’s now easier than ever for contractors to take cash flow management to a higher level, thanks to sophisticated new tools that draw on AI, machine learning, centralized data, and cloud-based analytics.

What Causes Cash Flow Problems for Contractors?

Let’s start by looking at a few of the most significant factors that can lead to problems with cash flow for contractors.

Overextension

Taking on too many projects at a time can lead to resources being spread too thin, and too much simultaneous risk.

High labor and material costs

Allowing these expenses to get out of control can inflate your overhead and make it harder to maneuver financially.

Supply chain issues

Difficulties in obtaining needed materials and supplies can cause expensive delays, missed project deadlines and cost overruns as well as unhappy customers.

Delays in processing change orders and claims

When change orders don’t get processed in a timely manner, that can hold up related billing and payments. Settling claims in a timely way can also help reduce costs over time by avoiding the expense of protracted negotiations.

Slow or late payments from customers

Failure to identify and communicate with customers who are behind on their obligations can exacerbate cash flow issues.

Retainage

Neglecting to bill and collect retention amounts in a timely way can also contribute to cash shortages.

Overstocked inventory

Too much inventory on hand can not only tie up funds used to purchase it—it can also escalate storage costs.

How Visibility Can Mitigate Cash Flow Problems for Contractors

The key to solving all the problems above is better cash flow planning, which includes better visibility into where your cash is and where it’s going. Achieving this depends on reliable forecasting, which in turn leads to better and more intelligent decision-making.

In fact, it’s not overstating the case to say that having sound cash flow management practices may be the most significant driver of contractors’ long-term success.

There are five central pillars to good cash flow management.

1. Careful project planning, from start to finish

Investing the time at the beginning of the project to map out the timeline, budget and risks in a clear-eyed and pragmatic way that doesn’t downplay or dismiss potential pitfalls.

2. Close tracking of expenses and milestones

Staying on top of expenditures and timetables to identify cost overruns, delays, and other deviations from the plan in real time, with as little lag as possible.

3. Proactive risk management

Not waiting until problems occur to decide what to do about them. Instead, model what-if scenarios and put contingency plans in place ahead of time, to help you respond and adapt quickly when things go off-course. It’s also important to include provisions in contracts that address what happens in the event of unexpected events and disruptions.

4. Diligent budgeting and accounting

Keeping a keen eye out for differences between projected and actual costs and staying on top of everything from invoicing and change orders to retainage to make sure you’re not wasting or failing to collect cash that should be in your coffers.

5. Wise management of materials and labor

This area includes good supply chain and inventory management, along with proper attention paid to staff salaries and bonuses, as well as subcontractor relationships. It’s also important to forecast your staffing needs in advance, so you have the flexibility and time you need to get the right team in place.

Getting the Right Tech in Place

Here’s the most important takeaway: the key to effectively addressing almost all these woes is achieving better forecasting and better visibility into budgets, costs, and timelines.

For that you need modern software that gives you centralized, real-time access to your data, and the ability to visualize it so you know what you know as soon as the information is available. This results in smarter decision-making, quicker action, and better control of cash flow.

But getting there calls for embracing modernization of your software and systems. Because the old-school approach of using siloed and disconnected spreadsheets to manage your data doesn’t give you the up-to-the-minute understanding and insight you need to cope with the kind of disruption that construction businesses have seen in recent years, and are likely to continue seeing in the future.

The first and most crucial step cleaning up and centralizing your data in a modern cloud-based ERP like Microsoft Dynamics 365 Business Central. That pays off in numerous ways, starting with making sure everyone in the organization has access to the same data—and the tools to understand it—so they’re on the same page about what needs to be done.

Other capabilities BC provides include:

• Cash flow forecasting is built right into Business Central. It allows you to set up a forecast that draws on multiple sources of information including general ledger, purchasing, sales, service, fixed assets and manual revenues and expenses. The result is a vital tool for making critical strategic decisions.
• Inventory and Supply Chain Management. Business Central can help you deliver on time and adapt to changing business models with visibility into your entire supply chain, from start to finish.
• Subcontractor Management. Business Central can make managing the subcontractors on your job sites simpler. For example, Business Central connects systems in your office to devices on-site, giving you real-time visibility into project progress and timelines.
• Timelines and Scheduling. Business Central’s scheduling tools help you visualize project timetables to keep projects moving ahead smoothly.
• Customer Payments. Business Central’s machine learning and predictive analytics technology can analyze payment patterns and identify which customers may have difficulty making timely payments on time. This allows you to set up proactive communication strategies to help keep those customers aware of deadlines well ahead of time.
• Data Visualization. You can also choose to take advantage of Microsoft’s Power BI tools, which include dashboards and visualizations that make insights from data easier to understand and communicate throughout the organization so the right actions can be taken.

One other bonus with Business Central is how seamlessly it integrates with the rest of the Microsoft ecosystem, including Outlook, Word, Excel, Teams, Power BI, Power Apps, and Power Automate. As such, you will be able to see data from every area of your company in one central location, therefore making cash flow management just that much easier.

Find out more about how Sikich can help your contractor business master cash flow management. Reach out to us today.