Cash Management
Cash management is the process of turning your sales into actual cash flow.
Simply making more money to spend more doesn’t lead to real financial success. True wealth is built by spending less than you earn and keeping that cash. In a construction business, it's crucial to understand that all incoming money often gets allocated back out.
Cash is your most valuable asset, yet it’s often the one that gets overlooked. Ideally, effective cash management should generate between 0.25% and 0.5% of your sales as profit. Importantly, cash flow doesn’t solely rely on profitability; you can maintain consistent cash levels even during downturns in business.
To effectively manage cash, you need to focus on areas like billing processes, depreciation strategies, and budgeting practices. Any of these factors can lead to insufficient cash on hand, and it’s usually a combination of issues that causes cash shortages. To ensure steady cash flow, it's essential to address all these areas within your business.
Cash Management Tools for a Construction Company
Understanding what you can afford and when is crucial for your construction business’s success. Often, business owners struggle to determine their financial capacity. A solid budget outlines what your company can afford, while cash flow management tells you when those expenses can be covered. The budget serves as your financial blueprint for achieving your goals.
Are You Practicing "Mailbox Management"?
Without an effective budget, it's challenging to set performance standards for your projects or develop incentive programs for your team. A cash flow forecast is essential; it allows you to make commitments that you can realistically uphold. You should always be able to project your company's cash position at least six weeks into the future—this is key to maintaining control over your finances.
As a business owner, you expect your employees to meet their responsibilities. Now it’s time for you to fulfill yours by establishing a comprehensive financial plan and budget. This plan will help you define the results you need from each team member and create monitoring systems to track their progress.
Remember, no one starts a construction company to spend time pushing papers and reading reports. The goal is to generate profit. If you want to ensure your business thrives and fulfills the dream that inspired you to start, it’s essential to take charge of your financial management.
"Cash flow has always been a top concern for contractors.
Slow invoicing, unexpected expenses and late payments from
customers can cause serious cash flow issues. Having insufficient
cash on hand decreases your ability to cover operating expenses,
make purchases, meet payroll, build emergency savings and
expand your business." - Deltek
