Managing cash flow is a vital part of running a successful construction business. Some contractors think managing cash flow means keeping track of how much money enters and leaves their business, but there's actually more that goes into it.
[Starting Cash + Cash In - Cash Out] = Cash Flow
Contractors and sub-contractors know there is more to profits than what is shown above, and most of you rely on your "gut feel" to see when the project has made a profit or not.
Cash flow forecasting is an incredibly valuable tool that helps you anticipate cash flow issues, plan for days when your cash flow is limited, and show the bank that you are prepared. It's a necessary process that you shouldn't ignore.
Here are some ways cash flow forecasts help construction business owners.
They help identify cash flow issues before they happen.
Most construction companies go through slow periods. Sometimes, those periods are apparent. A seasonal trade business, for example, will have decreased income during the off-season than during the on-season.
There can be less obvious peaks and valleys in your income, though you have to prepare for it.
Your cash flow forecast can help you monitor your day-to-day cash flow and anticipate when times will be slow before they hit. By predicting when the cash coming into your business might be light—or when you might have to spend more than you're accustomed to—you can avoid a cash crisis.
By examining your cash flow over the previous years and forecasting your future cash flow, you can better anticipate financial cycles and how they affect your bottom line.
They help plan for tougher times.
It's tempting to spend money when you have a lot coming in. Your construction business may need new equipment, or maybe you want to give all your employees a raise or a bonus.
That's a great thing to do, but it's only helpful if it doesn't jeopardize your business financially.
Cash flow forecasting is an excellent reminder about how your bank accounts will look during tougher times, so you can make important decisions about when to spend your money and when to save it.
If you know a slow period is coming up, it might be better to save your money for now and give out smaller bonuses. If you can anticipate your slow period, you can plan major purchases and bill payments to stretch your cash further.
At least by conducting cash flow forecasts, you're less likely to be surprised by a sudden cash-flow crisis.
They show banks you can plan.
Banks prefer to give their money to entrepreneurs who show they are capable of planning. Financial institutions prefer business owners who are realistic with their financial projections and show they have a means of addressing cash flow issues.
Final thoughts
Forecasting your cash flow gives you a clearer picture overall about your construction business and how the money moves into and out of it. It provides essential insight into your company's financial health.
If you haven't conducted cash flow forecasting so far, it's good to get started now, so you have a better understanding of your company's finances and prepare for the future.
Want help to improve your cash-flow? Contact us today.
About The Author:
Sharie DeHart, QPA is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on how to manage the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
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