Cash Management For Construction Companies

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Cash management is very important in this business environment. Money is the lifeblood of any business. As the saying goes, “criticism is everything.” As many banks tighten their credit standards or lending portfolios due to changes in the lending market, it is important for talbon companies to anticipate cash needs and adjust their cash flow operations accordingly. Otherwise, the company could face a liquidity crisis, i.e. wages. Failure to pay suppliers or subcontractors may result in bankruptcy or production cessation.

Money is not income. 

Let’s say you have a $200,000 contract for upholstery services that takes 30 days to complete. Contracts (commercial standard) can be claimed on the 25th of each month and general contractors are due within 30 days. Work will start on October 1st. Shop for nails and other supplies before you start drywalling. We pay vendors and performers every two weeks, so we pay checks for the work on October 14th. Purchase materials and supplies needed for the final phase of the job. Submit your $160,000 contract work invoice by the 25th. On October 28, you make another payment to the seller. Materials and equipment can be purchased as long as you accurately estimate the work and the price is not too high. rental of equipment or machinery; $140,000 to $160,000 in cash was spent on staff and general equipment.

You can now receive your payout by November 25th. 

However, you only pay 80% of the cost of the plan, so you can only get up to $160,000. You must complete the work by November 25th, invoice the remaining 20%, or $40,000, and receive it by December 25th. Typically, the bonds or government bonds in this example are owned by 10% or $20,000. If the contract requires archiving. You will have to wait several months before you finally receive your $20,000.

So, you spent $160,000 from $140,000 in October. 

You spent $30,000 in the first week. $55,000 in the second week, then $20,000, and around $55,000 in the fourth and final week. Payments will not be made until November 25th. You are earning $30,000 with this job. – $85,000 for the first week; – $85,000 for the second weekend; – Third Weekend $105,000, Final – $160,000. 4 weeks This negative or no cash flow will continue for the next 4 weeks until the first check for the $160,000 project is received. After payment, your cash balance will be reduced to zero. However, if you save 10%, you’ll only get a check for $144,000, and the $16,000 project will have negative cash flow. You will receive your second and final payment of $40,000 in 4 weeks (assuming the transaction is not closed).

Yes, we have a 20-30% operating margin in this business. 

Sounds good on paper. However, your cash flow has been negative for weeks 12-13 or 8 and you are financially struggling to get the cash to pay your employees and vendors. We’ve all heard the story of a contractor having a problem with a job and needing to find someone to replace it. Unexpected cash flow disruptions are the main cause of the bankruptcy of construction companies. If no jobs come out, your payments will cover a cash crunch and your business will suffer. Each assignment should include budget planning and analysis to meet financial needs.

One way to reduce cash flow is to get specifications for supplies and materials from your suppliers. 

30-45 days if possible. The magnitude and duration of negative cash flows can reduce negative cash flows. Another option is to use a contractor instead of a supplier which has the same payment terms as the contractor. So instead of paying the vendor every two weeks. The contractor must pay within 30 days of sending an invoice. In either case, the cash flow can be used to offset or reduce the negative cash flow.

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