Construction Money Management: Your Guide to Successfully Managing Construction Finances
Construction money management can get complicated. With so many moving parts, planning ahead so you can have cash on hand can seem out of reach.
Managing your company’s finances doesn’t have to keep you up at night.
In this guide, we’ll walk you through what’s important to think about so you can be proactive, not just reactive with your company’s financial management.
Table of Contents
- Flexbase: Streamlining the Invoicing Process is One Part of Our Construction Money Management Solution
- What is Construction Financial Management?
- 4 Ways Construction Money Management is Different from Other Industries
- The Importance of Financial Management in the Construction Industry
- 5 Money Management Issues Within the Construction Industry
- Flexbase: The Go-To App afor Construction Money Management Solutions
Flexbase: Streamlining the Invoicing Process Is One Part of Our Construction Money Management Solution
With a Flexbase subscription, you can:
- Streamline the paperwork required for a project
- Prequalify for working capital by our preferred lenders; and
- Get paid faster and reduce cash flow issues.
Flexbase also makes requesting payment easy for your customers by creating a cleanly designed web invoice. Flexbase will automatically submit paperwork to your customers’ AP process and automate paperwork compliance.
Requirements such as…
- AIA forms
- Schedule of values
- Lien waivers
- Prevailing wage
- Insurance documents, etc.
… are completed in 2 minutes.
Flexbase was designed to keep you organized and on top of things so you can spend your time managing your company’s finances to help it grow.
Thanks to discounts, timely reminders, and our ability to automate invoices and other paperwork, our customers get paid 63% earlier, on average.
Schedule a free demo today to learn how Flexbase can make managing your construction
Keep reading to learn more about what construction financial management looks like and how it’s different from other industries.
What Is Construction Financial Management?
Construction financial management is control over a company’s cash flow. By looking at your company’s cash flow, you can map how much cash comes in, how much goes out, and when.
Everyone is struggling to pay everyone in the chain.
And those at the bottom of the chain get paid last.
The goal of quality financial management is finding out if your company is actually profitable instead of just rotating cash.
A cash flow statement, just one part of construction financial management, is the analysis of all the cash that came in and went in a given period. These can be used to look at previous patterns and predict future activity.
Who Is Responsible for Financial Management in a Construction Company?
Who is responsible for financial management depends on the size of your company. A smaller company might have a financial manager who takes on these tasks whereas a larger company will assign specialized administrative responsibilities to individuals.
A financial manager may be responsible for:
- Tracking how the company’s financial resources are used
- Managing the company’s costs and budget
- Managing the cash flow through daily and monthly needs, annual projections, and taxes
4 Ways Construction Money Management Is Different from Other Industries
Construction money management is different from other industries in how their finances are structured. Let’s look more closely at financial management in construction projects and how these needs come with unique concerns.
The nature of construction often involves dealing with multiple job sites at once. Almost everything a construction company does is considered a project.
Within a project, each of these moving parts must keep accurate records in a complex web of project management and payment timelines.
When thinking of cash flow management in construction, industry level concerns are like a clock, and each cog is a project. Each needs to work properly to maintain the correct time. Projects are a mix of:
- And other costs
The cost of each component of a project is an important record-keeping factor. Because each project is different, knowing the cost of these components might sway how much you’re willing to bid on future projects.
#2 Decentralized Management
In the construction industry, equipment and employees aren’t dedicated to a single project year after year. Equipment and employees may need to move to two different job sites regularly.
Tracking each employee and piece of equipment is necessary to ensure that costs are attached to the correct job.
#3 Use of Subcontractors
Contractors have the unique ability to tap into their subcontractor’s financial assets during a project, which impacts the finances of your construction company.
Construction finance managers are not only responsible for issuing progress payments, but also for receiving and paying progress payments from their subcontractors. Financial management principles are applied differently in the construction industry for this reason.
#4 Payment Terms
Most financial systems are geared around single-year accounting. Construction projects, on the other hand, may be tracked across years throughout the lifetime of a project. Having multiple projects just increases the complexity.
Unlike most industries, construction companies have long-term contracts for each project, all of which receive progress payments as the project is being built.
Owners can withhold funds that ensure the contractor finishes the project, so a portion of the payments may be deferred. Sending regular invoices and reminders is necessary.
The Importance of Financial Management in the Construction Industry
To support you, quality financial management helps you plan and prepare. You can’t plan for what you don’t see coming.
Planning well tells you more than the current state of your bank account.
For example, an accounts receivable report may tell you which customers are delaying payment so you know who to follow up with, or which jobs to lien.
Proper financial planning can also help you track the time value of money in construction management.
Without proper financial management, accounts payable, accounts receivable, profit tracking, etc. companies are likely to run out of cash, causing problems with:
- paying subcontractors
- buying materials
- renting equipment etc.
Because of the nature of the construction industry, projects often require huge spikes in cash flow.
Managing Costs and Profits
Financial managers are responsible for managing the company’s costs and earning a profit for the company’s owners. If the balance of cash coming in and out is off, the safety net of liquid assets may not be there to help you.
Reports from the accounting system help you prepare and plan for the future. Instead of being reactive, you can be proactive.
Managing Cash Flow and Working Capital
Liquid assets are needed to pay:
- Employee wages
- Other business expenses
Many profitable companies fail because they simply run out of cash and are unable to pay their bills.
Managing this working capital well allows you to invest excess cash to earn interest and investment gains. It also helps measure your company’s operational efficiency and short-term financial health.
Freeing up this working capital keeps your business solvent and gives your opportunities to put that money to better use.
5 Construction Money Management Issues Common Within the Industry
Understanding the importance of financial management in the construction industry can help your company maintain a positive cash flow. Here are five primary issues found in construction money management.
#1 Payroll Responsibility
Those on a construction company’s payroll are the first victims of poor cash management. Suddenly, their paychecks are in question while you wait for your customers to pay their bills. The people you want to take care of the most are often the first to suffer.
#2 Using Cash to Purchase Assets
If you need to buy equipment or other large assets with cash in full, you may lose in the long run. Financing large purchases can free up your cash for other direct or indirect costs for your projects.
However, contacting the banks, compiling the paperwork, then waiting days or weeks for confirmation that you qualify for a loan can steal valuable time away from project deadlines.
You may need to finance, but you also may need to purchase those assets in a timely manner.
#3 Paying Invoices Before the Due Date
Paying your bills before the due date can leave you short on cash. Waiting gives you more money to work with until the end of the payment term. When you have cash on hand you can potentially:
- Purchase new equipment
- Invest excess funds
- Bid on future projects
#4 Failing to Send Invoices On Time
If late invoicing is a problem, you’re likely having to front or float cost until the invoice is paid. Not only does this increase your financial risk, but you now have less working capital to invest back into the company.
You don’t want to wait for customers to ask for an invoice. That responsibility is yours. And the faster you send the invoice, the faster you get paid.
Delays in invoicing compound cash flow issues faster in the construction industry because of the longer billing cycles. Longer billing and payment cycles are relatively common.
There is also a difference between due and owed. That gap adds to your accounting complexity. Because of this, accurately tracking what assets you have to work with can get difficult.
Many construction companies record an invoice amount as an account receivable. You may not be able to report it as income, but it can count on your financial statement as value owned by the company.
Accurate reports allow you to stay proactive.
#5 Slow Paying Customers
Waiting for payment from a customer leaves you without the money you need to run your business. And customers aren’t going to pay until they receive an invoice.
Getting invoices out in a timely manner can mean the difference between being paid on time and not being able to reinvest in your company or pay your employees.
Flexbase: The Go-To App for Construction Money Management Solutions
Flexbase was created with the understanding that our work has a positive impact:
- Families get paid faster
- Companies can access working capital better
- Manage your expenses is even easier
Using the Flexbase app can help your company maintain a positive cash flow through automated invoicing and reminder systems so you can focus your time on other things.
By inputting your information into our system, we automatically reach out to multiple banks in your area
Using Flexbase allows you to:
- Track projects
- Request payments from contractors
- Automate all paperwork involved in the construction billing process
And to make this easier on you, all of this is integrated easily with other software:
- Construction ERP
- Project management software
- Every accounting software
We understand the importance of financial management in the construction industry. Flexbase uses your payment data to give you the best rates from our lending partners. You can borrow capital to help your cash flow instantly.
Schedule a free demo with Flexbase today to see how you can better manage your finances, get paid faster, and have more cash on hand for when you need it.