Delayed payments, unexpected expenses, and inefficient processes can all contribute to a construction business struggling with their cashflow.
To help you spot what might be slowing down your cashflow, we’ve highlighted the most common factors and the steps you can take to tackle them.
More than half of all invoices sent to construction firms were paid late in 2022. When payments from clients are late, it can be challenging to pay suppliers, employees, and other expenses on time. This can create a domino effect that leads to further delays and financial strain.
And with many construction companies operating as subcontractors, there’s an even higher risk of not getting paid on time, as delays trickle down the chain.
To reduce payment delays, ensure that you have clear payment terms and follow up with clients who have not paid. Consider offering incentives for early payment or late payment penalties to encourage clients to pay on time.
You can also monitor the payment performance of your customers to stay ahead of late payment risks.
Over-reliance on a single client
If your primary client experiences cashflow problems, they may be unable to pay on time, which can have a significant impact on your business's cash flow.
To mitigate this risk, try to diversify your client base as much as possible. This will help ensure that you have a range of income sources and reduce the impact of a single client's payment issues.
You can also credit check potential new clients, to see if they are a risky business to work with, to mitigate the risk.
Inefficient invoicing and payment processes
An inefficient process can lead to delays and errors. If your invoicing process is manual or paper-based, there may be delays in sending out invoices, processing payments, and reconciling accounts, meaning payments are received later and your cashflow is strained.
To streamline your processes, consider using an online invoicing and payment platform. This will help you send out invoices more quickly, automate payment processing, and keep accurate records.
Examples of online invoicing platforms: Xero, QuickBooks, Sage.
Unexpected expenses can quickly deplete your cash reserves, leading to cashflow issues. For construction businesses, unexpected expenses can come from a range of sources, such as equipment breakdowns, supplier price increases, or project delays.
Maintaining a cash reserve for emergencies can help to manage these expenses. Considering a working capital loan can provide a buffer for unanticipated expenses and ensure you can continue operating during difficult times.
If this is something you’d be interested in, you could see what funding you are eligible for here.
Poor project management
Poor project management can lead to delays, cost overruns, and other issues that can negatively impact your cashflow. If you’re not managing your projects effectively, you may be incurring additional expenses, missing deadlines, or experiencing other problems that affect your business's cash flow.
Consider using a project management software to track progress, expenses, and timelines. This will help you stay on top of your projects and identify potential issues before they become major problems.
Example project management software for your construction business: Monday.com, Capterra, LetsBuild.
Cashflow management is crucial for the success of any construction business. By addressing the issues highlighted above, you can help ensure that you have a healthy cashflow and can continue to grow and thrive.