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The Importance of Cash Flow Forecasting For Construction Projects and How Flexbase Can Help

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No matter how well contractors plan and estimate costs and expenses, it’s impossible to know every single detail involved in a construction project.

It can be difficult to manage cash flow when:

  1. Payment and billing schedules vary
  2. Payments are delayed; and
  3. Unforeseen expenses arise.

Contractors should consider cash flow forecasting for construction projects to mitigate these variables.

In this article, you’ll learn about cash flow forecasting and the practical ways it can improve your construction business.

Table of Contents

Flexbase: Streamlining Analytics Is Part of Our Cash Flow Management Solution

Flexbase is the only construction billing platform you need.

We help companies:

  • Send invoices
  • Generate payment requests
  • Automate compliance forms
  • Manage cash flow
  • Access analytics reports

All of these services help you manage the payment process and project your cash flow in the days or months ahead.

Our platform includes inherent analytics tools built in which can show you how much money you actually have across all accounts and how much you can expect from clients in the next:

  • 30
  • 60 or
  • 90 days.

Flexbase can help to mitigate delays by giving you access to working capital and helping you get paid faster from existing clients.

In construction, the past, present, and future are important to your success.

Flexbase offers the assistance you need so you can make projections based on past trends.

Our analytics tools help you know:

  1. How much cash you have in the present
  2. What you can expect to receive in the next 90 days; and
  3. What you can expect to pay in the next 90 days.

Flexbase is easy to navigate, and there are no subscriptions or licenses to pay or keep up with.

It’s essentially free to use — fees start as low as 0.5% per payout received.

What Is Cash Flow Forecasting?

In the construction world, it’s difficult to consistently know how much money you really have because of the many moving parts and the often unpredictable nature of the construction industry.

Knowing how much money you have on hand is affected by factors like:

  • Continuously rotating cash
  • Receivables that are pending (commonly 90 to 120 days late)
  • Payables that are on a strict timeline (suppliers, workers, subcontractors)
  • Unforeseen costs

And for all of these reasons, it is also challenging to project how much cash you’ll have available in 30, 60, or 90 days.

Cash flow forecasting is a way to tell where your company’s money comes from and where it goes.

Forecasting helps construction companies know how much money they have in their “wallets” at any given time.

Cash flow forecasting involves recording money that comes in and goes out over a period of time — usually 30, 60, or 90 days.

Looking at those details for a particular period of time can help the company forecast or have a projection of what their costs and income might be in the future.

Why Is it Important to Predict or Attempt to Predict the Cash Flow of a Construction Project?

Money is coming in and going out at a constant rate, and if you don’t have a reasonable idea of cash that is available at a particular time, you may find yourself in a financial bind.

Payments are being made, supplies are being purchased, workers are being paid, and the construction company is also receiving payment — and all this is happening at the same time or in overlapping intervals.

It’s incredibly complicated.

Having a clear projection of cash flow allows you to:

  • Foresee your needs for cash in the days ahead, and
  • Estimate when you can expect to receive payment.

Flexbase makes cash flow projection easy because they have the analytics tools built into their platform.

Let us take on the cash flow projection work for you so you can focus your attention on your construction business.

Cash Flow Forecasting For Construction Projects: 5 Benefits

Planning ahead is a crucial strategy no matter what type of business you are in, but looking to the future to predict needs and income is essential in the construction industry.

Projecting cash flow is beneficial for:

  • Planning
  • Budgeting
  • Saving

#1: Planning

Projecting cash flow aids in planning in two ways:

  1. It helps predict shortages and excesses.
  2. It aids in planning for changes in a business.

Cash flow forecasting allows you, the contractor,  to consider various situations that will impact your cash flow and help you plan accordingly.

A cash flow for construction project example might be:

  1. If you realize that the summer months bring the most business and income, you can plan to set aside funds to provide for the slower and less busy months of the year.
  2. Or let’s say you decide to make a change, like adding a new office, or buying a new piece of equipment, you can use the cash flow projection to know how much of an increase in sales you will need to cover the cost.

Work in the construction realm is often unpredictable, making it impossible to plan for everything.

Planning based on a cash flow projection can help you be more prepared for those changes when they happen.

#2: Helps Keep Track of Overdue Payments

There will be instances when payments become overdue, and with so many suppliers and subcontractors to consider, several payments can be overdue at a time.

Cash flow projections can help keep track of those late payments and can give insight as to when the cash will be available to bring the payments current.

Conversely, contractors can also be affected when they don’t receive payment for their services on time.

It can become a ripple effect — If the contractor isn’t paid on time, he may have difficulty making his payments to subcontractors and suppliers on time.

Flexbase can manage these overdue payments for you and help you get paid faster — 63% faster, in fact — by automatically sending friendly reminders when payments become overdue.

#3: Plan For Cash Gaps

Consistent cash flow can be an issue even for the best contractors because cash can oftentimes come in large sums or at irregular intervals.

Maybe you’ve experienced one or more of these scenarios:

  • You buy materials upfront before being paid by the client.
  • To complete the job on a project, you need to purchase special equipment.
  • You have a gap in between projects.

Any of these situations can drastically affect your cash flow.

Seeing cash gaps before they hit can help you effectively manage your cash flow better to avoid them, or at least be prepared when they come.

#4: Manage Cash Surplus

Cash surplus . . . that’s something everyone desires.

Many contractors experience times when they have a surplus in cash.

Knowing how to manage that surplus is essential to the success of their business.

Knowing when they’ll have surplus cash in the bank, and being able to see where and when the surplus will occur, means that business owners are better able to plan for what to do with the surplus.

With their extra cash, contractors may be poised to pay bills or decide to put it in savings for future or unforeseen costs.

#5: Helps Track Your Budget And Spending

Tracking budget and spending are key in any business. Without these, a business can be derailed quickly and end up in quite a financial predicament.

  1. Creating a budget is the first step — You’ve got to know what expenses you’ll incur and plan for them.
  2. Tracking spending is the second step — Without this step, you’ll never know if you’ve gone over budget.

Cash flow forecasting can help you track the accuracy of your budget and if your spending is on target.

Profit And Cash Flow: Understanding The Difference

Cash flow and profit are easily confused, so it’s helpful to first look at how they are similar.

Both cash flow and profit deal with the difference in income and expenses.

In simplest terms, a profit is determined by subtracting expenses from income.

Cash flow in construction is not as cut and dry because of billing structures and various contracts.

And with money coming and going out at different times, it’s difficult to see a clear relationship between income and expenses.

For example, you may incur expenses in January that don’t get billed until February, and payment may not be received until March. In this case, simply looking at income and expenses each month will not give you a very accurate overall picture of your finances.

This is why cash flow projections are so important because they can help you see when your projects are billed and when expenses are expected.

How To Create Cash Flow Forecasting For Construction Projects

Cash flow projections for construction projects should include:

  • An evaluation of projected incoming cash flows for planned, current, and future jobs.
  • A carefully thought out billing schedule that allows for payment shortly after an expense is incurred.

Contractors can manually create their own cash flow projections by using tools like Quickbooks or Excel.

And on the surface, it sounds rather straightforward and simple, but because of the different types of expenses and the timing of the expenses, creating a simple Excel spreadsheet may not be adequate.

To understand how cash flow projection reports work, it’s important to understand the three types of cash activities:

  1. Operating
  2. Investing
  3. Financing

Even though your company may not be participating in all three activities, examining the categories you are involved in will help you see where you are being profitable or where you are losing money.

Studying past reports can be incredibly helpful in noticing trends and making future cash flow predictions.

Operating Activities

Operating activities are made up of income from sales minus expenses (labor, supplies, and other miscellaneous expenses).

To figure cash flow for operating activities, start by estimating your income.

Then subtract:

  1. Estimated payments to subcontractors and suppliers
  2. Estimated payroll expenses
  3. Estimated miscellaneous business expenses

Investing Activities

Investing activities include buying and selling transactions involving fixed assets like equipment and buildings.

To calculate cash flow from investing activities, subtract the expected income from the sale of assets from the expected amount of funds to be spent on purchasing assets.

For example, a negative cash flow of $15,000 would result from a $30,000 purchase of a new truck and the $15,000 sale of a skid steer loader.

Financing Activities

Financing activities include:

  • Issuing stock
  • Long-term debt payments
  • Leases
  • Dividend payments

To calculate financing activity cash flow, add to indicate money coming in and subtract to indicate money going out.

After you have calculated the cash flow from all three activities, simply add them together to see the projected cash flow for the period of time considered.

Let Flexbase Track Your Cash Flow Analytics For You

Does creating your own cash flow projection sound complex?

With all the details and timelines that need to be considered, formulating your own cash flow projection report can be a daunting task.

And even the smallest mistake or omission can result in drastic consequences for your business.

The good news is, you don’t have to do it on your own.

The Flexbase platform comes with inherent analytics tools built in that show:

  • How much money you have
  • What is owed; and
  • What is expected to come in.

These analytics are visible and easy to interpret on our app.

Flexbase offers cash flow analytics and so much more. Click here to schedule a demo.