Cash flow problems are ingrained in the history and economics of the construction industry. As long as contractors have been working, they’ve needed to make upfront investments in labor and materials to get the job done. Solutions to cash flow problems, such as mechanic’s liens, have roots reaching as far back as the Roman Empire.
Unfortunately, recent research shows the industry is far from resolving these issues and the secondary problems they cause. That’s why it’s important for management to be aware of why cash flow issues arise and keep close track of payment statuses.
In many cases, cash flow problems send ripples through the business. They can impact payroll, the ability to take on new projects and even pricing decisions. And they remain a frequent problem for one in five construction businesses, according to construction industry professionals surveyed by TSheets by QuickBooks and Levelset. That’s a rate consistent with data collected on the industry’s cash flow problems in 2018. However, the research shows there are opportunities to improve the outlook for construction companies facing cash flow problems.
For example, more than half of survey respondents indicated they never charge interest for late payments. The risk of incurring additional costs for delayed payment may act as a deterrent and reduce instances of late payments. Forty-four percent of respondents indicated they never offer flexible payment options for overdue clients. When cash flow can make the difference between keeping the business running or closing the doors, it may be better to receive a partial payment than none at all.
“Always remember to be knowledgeable about the interest rate you can charge by the state your business is in, and always add it to your invoices,” one anonymous survey respondent recommended. “If customers have a problem paying a down payment, have them purchase all the material upfront even if they pay directly to the vendor,” they continued. Additionally, executives should be aware of a client’s legal rights around withholding payment.
Even before contracts are signed, contractors can reduce the risk of a cash flow problem by using information about a client’s payment history to make informed decisions about who to work with. It may be a wiser decision not to enter a deal than to manage a bad one. To avoid surprises, ensure payment terms are established during contract development.
But even with the best planning and management, problems can emerge. To avoid major problems, awareness of the options available to resolve cash flow problems is also important. Luckily, there is a variety of solutions to cash flow problems.
Most respondents to the survey indicated that personal funds are the first option they use to cover costs while they wait for payments. The second most popular option was a short-term loan. In both cases, the company takes the hit.
If payment problems persist, options include filing a lien against the unpaid work, working with an invoice factor or selling the debt. Payment problems can sometimes escalate to the point of a lawsuit. But this can be a costly endeavor, so it’s wise to plan for these costs in advance.
Proper budgeting, keeping a close eye on payment statuses and maintaining awareness of project developments throughout the length of a contract can help prevent problems. Unfortunately, passiveness around payments can end a business, so managers and executives should maintain proper diligence around the payment process.
Smart management and sound accounting can protect the business, so invest the time to avoid cash flow problems and properly manage them when they arise.
