How can you manage cash in construction companies

A very important thing to consider these days about a company’s life is the cash management. Because of the actual situation of the banks and credits, companies should know in time about their needs. So, every company should have some cash available for payroll and other things that need to be purchased or paid.

It is very important not to confuse cash with income. They are two different things. For example, let’s say that you have a $200,000 bankroll for a contract. You will carry on your business for a month. You will start on 1 October. You will need to purchase your materials and you will need to pay your trades people every 2 weeks. You will buy materials and supplies for the last phase of your work. So, you will spend $160,000 after you pay your trades man second time and you cover all the costs with rental, equipment and other things.

You will wait until November 25 to receive your payment. You billed for 80% of the project, so your payment will be $160,000 maximum. The other part of 20% will be received on December 25. There will be no retaining. Government contracts retaining are typically 10%. You will have to wait several months to receive the retaining if your contract calls it. In conclusion, you spent $140,000 – $160,000 of your money in October. You didn’t receive any payment until November 25, so you have a cumulative negative cash of about $160,000 after four weeks. This negative cash flow will continue for another four weeks when you will receive the first check of $160,000. Now, your cash shortfall turns to 0. The retaining will turn your cash flow to negative again, but after four weeks, it will be positive again because you’ll receive another $40,000.

You will have a 20-30% profit, but you will have a negative cash flow for 12-13 weeks. The most important fact why companies go out of the business is the unplanned cash flow. So, you will need to think about additional cash. You can find help from a line of credit. Also, you can pursue a line of credit with accounts receivable financing or factoring firm. They will have higher rates than the banks but they will help you if you will be ready for a big contract.

So, cash is the most important thing to care about in a company. You will need to plan everything very carefully and make sure that you will have enough cash to cover all the costs and make your business grow.

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