Cash Flow Forecasting Guidelines For Your Next Big Construction Project
When it comes to managing construction cash flow forecasts for big projects it can be quite a daunting task. There are a lot of factors at play here because firstly contractors do not get paid upfront and then construction professionals also deal with a myriad of other issues.
Cash flow in construction projects depends on factors like you are not paid immediately as you could be dealing with substantiation requirements, variation, claim negotiations or claim preparation and may be engrossed with progress claim preparation. This may disrupt your work schedule and prevent you from finally getting payment.
Another important factor to consider here are the project timelines and scope of work being broad and additional complexities that arise within the project lifecycle. One may have to pay attention to conditions that are mentioned in contracts and the logistical sequencing of tasks may be an issue when it comes to cash flow.
The important thing to consider here is that throughout the life of a project many things can change and it has a direct impact on cash flow forecast. Additionally, what is detrimental to the success of the project are wrong estimates related to project revenue and when cost forecasts are inaccurate.
There is a huge price to pay as inaccuracy in cash forecasting can lead to profit leak making construction firms tap out its cash reserves. This will also result in failure with respect to supplier payment, even getting the payroll wrong and the firm cannot meet its monetary commitment to subcontractors.
Here are the few construction cash flow forecast tips and guidelines that will help you finish your project within defined budget and on time:
Improve accuracy of forecasts by introducing phased timing approach
Many things can directly impact cash flow and those factors are also subject to change. Hence construction firms need to have a contingency plan and also information at disposal like what has changed and why this ripple happened. Contractors should be in a position to analyze what will be the overall impact on the project, enterprise and business unit.
As far as different areas of the project are concerned, a lot of money is constantly being invested in and out during the project lifecycle. This is the reason allocation of costs and a time phased cost budget baseline can come in handy.
You can make forecasts that are accurate and that will lead to improved efficiencies and increase in productivity. This will result in strengthening the financial standing of the construction project and in reduced cycle times.
Cash Flow Forecast should be based on rolling enterprise
Construction professionals should ensure that their working capital requirements for a big construction project are provided for in advance. This can be done by creating a rolling enterprise operating cash flow forecast on a project by project basis. This will assist you in assessing project performance, in figuring out potential funding requirements and also analyze your cash position.
As a standard cash flow forecast is simply not enough to meet increasing fiscal challenges associated with projects you need to have a rolling enterprise plan in pace.You can then be prepared for the opportunity to work on a large scale project by better managing the commercial risks associated with the projects.
Achieve Data Integrity by integrating your key systems
For better cash flow forecasting you need to switch to an integrated system that allows you to share information efficiently. Also, construction software can help in connecting team, office and job site so that there is improved communication and you are aware of the project progress, budget and stage you are in currently.
Disparate data causes discrepancies in execution and having data silos can be detrimental when data is stored separately in separate systems that are not in sync. It will result in difficulty in organizing data that will ultimately result in erroneous execution. What will ensue is waste of crucial resources that will lead to delay in project completion. It will also upset your client when you are not able to meet timelines and go overboard with the budget.
Having an integrated solution that connects the field to the office and that has compatible features with unique data processing capabilities can help contractors provide a single source of truth. This will also lead to standardization and solves the high risk, complex, error-prone system of cash flow forecasting.
You can also rely on ProjectPro with Business Central to simplify the cash flow forecasting for you as it helps you make sense of construction data and improve your accounting process. With a cloud based accounting software system you can manage construction operations from anywhere and carry out financial risk analysis.
To prevent financial distress it is a shared responsibility of all construction owners to maximize cash flow by keeping the construction business financially healthy and introduce incentives related to cash flow performance.
Way Forward
Cash flow is a crucial aspect of any commercial construction project. Contractors need to optimize cash flows and effectively manage the costs of projects. This is a single most important factor that will define your construction success.
To manage cash flow that is considered the heartbeat of construction business, it is fraught with unique challenges. Hence, construction professionals must process change orders as quickly as possible when project timelines are extended and more resources, money and time is invested than originally planned. You can also make it easier by processing payments electronically.
By having a proper system, robust construction-specific software and admin tools, contractors can do away with avoidable dalys and significantly reduce risks associated with big projects.
It is also easy to confuse profit with cash flow but having a sound cash flow forecast is important because otherwise you are setting your business for failure. Therefore, construction firms must resolve their cash flow issues at the earliest.
Overall, construction consists of a lot of moving parts and is deeply interconnected as one issue significantly impacts other aspects. To know how ProjectPro with Business Central can help you strengthen your accounting process and improve cash flow, schedule a demo with our top construction experts today!
