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The Importance of Cash Flow Management in Construction

The significance of cash flow management within the construction sector cannot be overstated. It serves as the driving force of a construction company’s operations, enabling it to fulfill its financial obligations to employees, subcontractors, vendors, and suppliers. Proper management of cash flow is crucial because any disruptions, such as delayed payments from clients or extended project timelines, can have severe consequences. These disruptions can strain the company’s financial resources, leading to potential cash shortfalls or even more severe financial difficulties. Oracle NetSuite highlights the precarious situation construction companies can find themselves in due to a few late or missed client payments, overstock of inventory, or sudden increases in material costs. Per Sage, a few tips to improve a construction company’s cash collection include automating time collection processes, collecting signatures on site and providing backup documentation, and creating an accounts receivable team. Depending on the size of a company, an accounts receivable team can vary from one person to an entire department. However, even one individual can make a drastic difference in the cash collection process for a construction company, as they can follow up with accounts yet to be paid, monitor and report on cash flow each month, and communicate with customers and project managers.

To further navigate the challenges of cash collections, implementing an effective cash flow management system is paramount; this involves selecting appropriate software and systems tailored to the company’s needs and ensuring that competent personnel are in place to manage these processes. As companies grow, it becomes necessary to reassess and possibly upgrade their software and expand their team to maintain efficiency and effectiveness in managing cash flow. A key point in reassessing a company’s software and team is that it be done before it becomes a necessity. A company that waits too long to transition to a new system or add team members can hinder the efficiency and effectiveness of their processes and stunt the growth of the company. This can also be true for the opposite; a company that upgrades to a system before they can properly manage it can be just as detrimental to a company and their cash flow. Trimble Viewpoint emphasizes the importance of understanding a business’s specific needs and challenges when choosing management software. The right software should not only be evaluated based on cost but also on the value it adds to the company by automating processes, managing projects efficiently, and ensuring projects are completed on time and within budget.

Investing in the right cash flow management strategies, systems, and software is essential for construction companies aiming to thrive. These strategies not only help navigate the complexities of the construction industry but also set the foundation for sustainable growth and success. As companies evolve, continuous evaluation and adaptation of these systems will be key to maintaining a healthy cash flow and, by extension, a robust business operation.

For more information about McKonly & Asbury’s Architecture, Engineering, and Construction (AEC) experience, visit the AEC Industry Page and don’t hesitate to contact a member of the AEC team.

About the Author

Brett Murphy

Brett joined McKonly & Asbury in 2021 and is currently a Senior Accountant with the firm. Brett primarily works with clients in the manufacturing and construction industries, as well as performs employee benefit plan audits.

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