Building Out Cash Flow Scenario Models

It's always good to create best-case, worst-case, and moderate financial scenarios. Through cash flow forecasting, you'll be able to see the impact of these three scenarios and implement a suitable course of action. You can use the models to predict what needs to happen, especially during difficult and uncertain times. 

In situations where variables shift quickly, such as during a recession, reviewing and updating your cash flow forecasts regularly on a monthly or even weekly basis is highly recommended. By monitoring your cash flow forecast closely, you'll be able to identify warning signs such as declining revenue or increasing expenses.

How To Improve The Accuracy Of Your Cash Flow Forecast

In cash flow forecasting, your estimates are based on historical data. This means having accurate historical information is critical. Below are some tips for improving its accuracy:

• • At the end of the week or the month, input your actual results or the cash that was received and money spent. This will allow you to identify which items you got wrong in your estimates and evaluate why you got it wrong. This analysis may lead you to place more significant issues and help you make adjustments to your assumptions.
  • Carefully evaluate all of your assumptions. Take note that just because it's correct now does it mean that you'll get it right in the future as well. Go through everything, especially when it comes to sales, and validate it.
  • Don't forget to include annual payments, loan payments, credit card debt payments, and estimated taxes.
  • It's almost impossible to forecast where your business will be in longer than one year out. You'll introduce more risk and greater uncertainty the further out your financial scenario models go.

How To Manage Your Construction Cash Flow

Owning a small business in the construction industry can be incredibly stressful. In addition to the long days and hazardous working conditions, you have to worry about cash flow issues. It can take a long time to collect on payment from your clients or contractors who hired your business, and in the meantime, you have to pay employees, cover fixed expenses, buy supplies and pay your subcontractors. 

Here are three tips for managing your cash flow if you own a small business in the construction industry. 

1. Be aggressive in following up on invoices 

Small businesses in the construction industry are at risk of having their clients not pay them on time. Or at all. Being too passive in collecting unpaid invoices or reminding clients when payment is due will not help you manage the money you need to pay your bills.

Sending out reminders of invoices that are due can not only speed up getting you paid but also encourage clients who were considering not paying you to reconsider. Reach out to clients if necessary to discuss payment options. Even a payment schedule is better than no payment at all.

The worst thing you can do is sit around and hope your client will pay you. 

 2. Watch for scope creep

"Scope creep" occurs when clients or other project stakeholders change a project's goals or deliverables. Almost all projects experience some form of scope creep, but too many changes to a project can severely impact your bottom line, and it can hurt your cash flow. 

Ensure your project's terms are set out clearly and let clients know that any changes to the project will result in additional fees. If clients attempt to change the project, you can remind them about the original agreement and the extra costs. If they insist on making the changes, you are free to charge the agreed-upon amount. 

3. Consider delegating the financial tasks

Many construction small business owners become self-employed because they have construction skills, not because they want to be businessmen. The financial aspects of running a construction business are complex and take a great deal of time and planning. That can add much responsibility to the business owner. 

Hiring someone to take care of your business's financial aspects, or even to advise you about the decisions you face, can take the stress off you. That's precisely how we can help. Having someone on your side who has the financial expertise that can assess your business, advise you about your cash flow and help you secure funding is invaluable. It will be worth it in the long run with the time and money you'll save. 

Final thoughts

Whether your contracting business is growing, fighting for survival, or you want to run it better, a cash flow forecast can help you make critical decisions that impact the financial health of your company.

Most construction business owners face cash flow issues at some point in their careers. Unfortunately, those in the construction industry typically have a more difficult time managing cash flow. The large scale of the projects, the multiple stakeholders involved, and the number of factors that can go wrong on a project all increases the financial risks.

Following a few steps can significantly enhance your cash flow and make financial management in your business a more painless process this year and the years to come.  

To get expert assistance with your cash flow forecasting and management, connect with me through email or phone call. Get in touch to book a one-on-one free consultation, and we'll work out a plan to help you keep more money in your pocket.