Cash flow forecasting for construction projects is crucial to ensuring that a single project doesn’t negatively impact a business’s financial health too much. However, far too few companies are worried about this important metric.

We’re going to discuss why cash flow is important and why you need to monitor this important financial metric.

What is cash flow?

If you don’t know how to prepare cash flow for construction projects, it can seem intimidating. However, the math is basic and involves:

·         Listing all of the money coming into the business

·         All of the money going out of the business

Cash flow impacts liquidity, so you cannot count pending invoices in the equation because the invoices have yet to be paid.

For example, let’s assume that you have a $500,000 project that is paid in installments of $100,000 based on milestones. Let’s assume that you receive the first $100,000 and have $60,000 in expenses. The project would have a cash flow of $40,000.

However, while waiting for the first payment to be made, it’s possible that you’ll have negative cash flow because you’ve covered costs through credit or other means.

The importance of a project’s cash flow cannot be understated, especially when you’re working on larger projects. A massive project may eat up a majority of your resources. If there aren’t other forms of income coming in at the same time, you may struggle to maintain the cash flow necessary to keep your business’s finances healthy and pay off your debts along the way.

Importance of project cash flow

Why would liquidity and cash flow matter for your business? It’s a crucial metric that can help you manage projects better. The importance of cash flow for construction includes:

·         Project managers that have cash flow reports and statements can know when funding is necessary and how much funding is necessary. Projects have inflows and outflows, and running forecasts on a project-by-project basis will ensure you have money to pay your debt during a project.

·         Project planning requires your project manager to adjust to cash flow issues. Forecasts empower your team to be proactive and secure financing ahead of potential problems.

·         Bidding on a project is easier and more beneficial to the business when you can predict how much expenses and cash will come in during the project.

Proper cash flow management is crucial to any construction company’s success. A few of the ways that you can start managing cash flow is to run projects. You can use software to generate these projections accurately, and you should make them during the proposal phase.

A few of the things to consider when creating cash flow projections are:

·         How much money will come into the business and when will the funds come into the business?

·         What expenses will the project entail in total and in increments as milestones are met?

·         How likely is there to be unexpected expenses? And how much would these expenses be? 5% of the project? 10%?

You should run forecasts for each and every project so that you can properly manage your cash flow throughout a project.

Proper cash flow management

If you forecast cash flow and know of potential issues during a project, you can make key demands when bidding on a project. For example, proper management requires you to:

·         Demand a certain percentage of the project’s fees upfront for materials and overhead

·         Negotiate proper payment schedules to keep money flowing into the business

·         Analyze bidding estimates accurately to ensure that projects offer enough profit margins to be financially viable

Working with a financial officer or accountant can help you manage cash flow properly, but software makes the process easier. The right software empowers construction companies by ensuring that you can run cash flow forecasts and statements at any time using your current accounting data rather than inaccurate estimates.

Additionally, if you use software, you can reduce the billable hours of your financial officer or accountant, or you can free up their time so that they can focus on more important business tasks.

Cash flow software for construction helps your project manager make the right decision when bidding on projects and even when passing up certain projects because they don’t align with your company’s financial health.