While contractors have struggled for a long time with compiling data and turning projections and reports around quickly enough to satisfy their stakeholders, this past year proved to be even more challenging.
Over the past 18 months, construction companies have dealt with a variety of short- and long-term business challenges — from labor shortages in an already-tight job market to price escalations on raw materials and delays in material delivery — all of which are making their financial projections look less favorable.
Managing Cash Flow
According to PwC’s Working Capital Report 2019/20 study, construction payments take up to 90 days on average to be processed, putting an additional strain on a company’s cash flow.[1] Meanwhile, CFMA’s 2021 Benchmarker Results found that the average length of time in which cash is on hand for construction companies is only about 33.6 days,[2] which means that businesses only have enough cash to stay afloat for about five weeks until the cash inflow stops. This has caused a serious problem for construction companies over the last year as delayed projects and late payments continue to plague the industry. Many of these statistics around payments relate to “first-in-line” to be paid — most commonly general contractors. What these statistics often fail to mention, however, are the downstream payments to subcontractors and trade contractors that have even more pressure on the state of their cash flow.
For example, when the recent raw materials shortage caused prices to increase across the board, contractors were forced to rethink their material strategies and inventory management. Budgets that had been set 6-12 months in advance were based on cheaper material prices that were no longer comparable to the prevailing prices. Therefore, contractors often couldn’t afford to buy materials at the start of the job. Such oversights in backlog and jobs in the bidding stages of a contract could not be ignored as contractors struggled to navigate a volatile market.
The last year served as a wake-up call for the construction industry, and it has become clear that it is no longer a matter of if but when the next market upheaval will hit. Project managers (PMs) and finance professionals in the industry need to think strategically and place more focus on their cash position and management strategies now, more than ever, in order to stay afloat.
Managing New Cash Reporting Pressures
As the construction industry starts to rebound after the pandemic, organizations face increased pressures to provide detailed budgets and cost breakdowns for their customers, as well as banks and sureties that are stress-testing cash projections to assess risk. Cash flow strain is a pervasive problem that nearly all contractors share, and many rely on financing for their projects to secure materials and assets. This allows construction companies to take on larger projects and grow their business at a faster rate than they would be able to otherwise. But with many banks tightening up credit lending and demanding 13-week cash flow projections as a post-pandemic precaution, contractors need to generate forecasting and budget reports at a faster rate. This will help contractors understand their cash on hand more frequently and accurately, therefore limiting them from last minute withdrawals of their credit line.
To help manage this, many construction companies are working on tracking their cash flow data monthly and comparing it to scheduled projects to anticipate income further out. This is a valuable first step for construction companies and finance teams looking to understand the company’s inflows and outflows, by mapping out where their money is coming from and where it is going. At a basic level, cash flow forecasting can help finance teams identify gaps in funding and plan for those gaps accordingly, while also acting as an important forecasting tool to determine the financial health of the company. When there is a significant cash flow discrepancy, tracking for it will alert companies of the need to take immediate action. Consistent monitoring can also alert finance teams to slow leaks that could lead to serious issues if left unchecked.