Managing cashflows in a construction company is undoubtedly a challenge. Decision-makers have to deal not only with low margins but also with delayed payments for completed work. Let’s look at this problem more closely and find possible solutions to improve and streamline the whole process.
Managing the financial aspects of a business is always a challenge. It is especially difficult in the construction industry, where many companies deal with extremely low profit margins. How to survive in such hostile conditions and manage cash flows without risking the company's financial stability? Today, we will focus on these challenges and try to find possible ideas and tips on supporting financial management, especially concerning the cash flow aspect.
The problem with keeping a company's financial stability and liquidity has always been present in the industry. One of the reasons for that are extremely low margins. In 2019, the average profit margin before tax was around 6%. At the same time, general contractors could count only for 4%. Having such a small number (and it is still before taxes!) gives a company minimal possibilities to manage the cashflow.
We also need to mention the issue with delayed payments. Did you know that only one in ten construction businesses doesn’t get a total compensation until the work is finished? Typical waiting time varies from 40 to 60 days, but 1 in 5 companies has to wait even longer! How to talk about liquidity in that case, when your company has already incurred costs but will receive money for them in two months?
The pandemic of COVID-19 has significantly influenced the financial situation of many construction companies. Due to lockdowns, the global supply chain has been interrupted, causing the delay of materials and the rise of their prices. For example, the steel price has gone up even 75% in less than a year.
Coronavirus pandemic also deepened the payment problem in the industry. In 2019, up to 61% of companies received a total remuneration for work whereas now, it is only around 11%! This is currently one of the biggest challenges in the industry, as without a stable income and planned costs, companies may find themselves in a very difficult financial situation.
Even though the whole industry faces similar challenges, the reality of every business is different. But there are guidelines, which you can follow, on how to approach financial activities to make them easier and more effective.
To properly plan and manage cashflows, you need to know what is happening in the company. Of course, you cannot check every indicator of every project, as you need to perform other activities. Try to pick only crucial numbers and check them regularly. For specific projects, it can be: budget, project cost (and the ratio of these two), received to date and outstanding. At the company level, we advise you to monitor summarised numbers of sales invoices, purchase invoices and due accounts.
Unfortunately, the payment process is not 100% dependable on you. However, try to streamline the process, so that it takes the least time possible from your side. First, try to review your current process. How much time does it take to prepare the sales invoice once a client accepts the valuation? How much does the valuation process take? Who is responsible for documentation approval, and how much time do they need for that? Try to find actions that can significantly shorten the process with minimal effort put on changing them.
Construction companies do not suffer from the lack of data. They rather have problems with organising it and extracting the information. That is why organising your invoices is a necessary step on the way to manage your cashflows better. If you kept them only in paper versions up until now, it would be a good idea to create a file or excel where you could transfer crucial data like name, the sum of money and date. Thanks to that, you could quickly check who still hasn’t paid your invoices and needs a reminder or what sums of money you need to pay in the future and how to better plan your expenses.
Following up on the aspect of planning your future costs, you should always make sure that you are paying only for the things that were delivered. Try to establish a transparent process with your stock manager, so that you know who is responsible for which part of the process in future deliveries. Such double-checking will also be beneficial for your projects as you make sure that materials are ready and there is no risk of delays.
Remember! No magic solution can make your cash flow management neat and clear. However, proper construction management software gives you the possibility to gather and organise all your financial documentation in one place and generate reports faster, thanks to automation. Such a system gives you tools to make better decisions based on accurate and detailed data.
The biggest problem for construction companies is not the lack of financial data. It is the lack of control over it and the time-consuming creation of financial reports. Archdesk offers a set of tools that, altogether, can give you crucial insights into your company’s financial situation and allows you to manage it better.
There are two types of dashboards in the software: per specific project and the whole company's perspective. The financial dashboards contain all the data summarised together, giving you better visibility on how your business is currently performing.
Valuations can be prepared based on quotations submitted at the beginning of the project. The structure is ready, so you do not have to build it from scratch, devoting additional time. Also, the report can be sent directly from the software with a customisable approval process, which also reduces the time of preparations. All valuation data is visible in the software, so you can see the current status and act accordingly if any action is needed.
All your invoices can be created based on the existing valuations, reducing the time by eliminating duplicate data entry. Also, Archdesk gives you the possibility to see all of them on the reporting dashboard. Thanks to that, you gain better control over your financial documents as you can quickly check the status of a specific invoice.
They present the compilation of the creditors and debtors. You can quickly find information on how much you owe the creditor (or how much debtors still need to pay you) and take the necessary actions. Also, the dashboard shows you the dates of financial liabilities, so that you can better plan your cash flow changes in time.
We are aware that cashflow management is a challenging and time-consuming process. However, to assure the company's financial safety, it is necessary to control the cashflow stream.
If you feel like you are facing difficulties with the process, feel free to contact us! We will be more than happy to help and focus directly on your specific pain points and needs.
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