Cash Flow Management for Construction and Real Estate Companies: Fundamentals You Need to Know

Cash flow management for construction and real estate companies has always been a critical challenge. The lengthy gaps between winning projects, completing work, and receiving payments—or between development phases and property sales—pose unique cash flow risks.

As a result, business owners and their leadership teams must master the fundamentals of cash flow management. Here are a few to keep in mind.

Banking strategy

Where does your revenue go when you get paid? Hopefully not into a shoebox under your desk! For both construction and real estate companies, a sound banking strategy is essential, whereby you consciously plan where to keep your money and in what type of accounts.

Think of your bank as a cash flow management partner. If you’re dissatisfied with the services you’re receiving, you obviously shouldn’t hesitate to shop around. When contacting a prospective bank or working with your current rep, ask about specific ways the institution can help your business.

For example, you may be able to create a sweep account that automatically transfers excess funds into an “overnight” investment account. This way, at least some of your funds are earning interest instead of just sitting in checking or savings. Also, ask about the latest bonuses and promotions being offered. Banking is a competitive industry these days and you may be able to benefit.

Financial forecasting

Sound financial forecasting is another fundamental for construction and real estate cash flow management. It involves estimating cash needs by analyzing past billings, tracking payments on current projects, and projecting expected revenue from your backlog — all while keeping a close eye on direct and indirect costs, as well as overhead.

You can prepare forecasts on a job-by-job basis or for the company as a whole. Forecasting’s major benefit is identifying surplus and deficient cash flow periods. Done properly and regularly, it should help you:

• Ensure that cash flow remains at an acceptable level,
• Allocate excess cash for investments or capital goods,
• Set up disbursements to better align with receipts,
• Pinpoint cash deficiency periods to optimize borrowing terms, and
• Identify the clear need for additional working capital.

Precisely how to go about forecasting is beyond the scope of this particular article. Suffice to say that qualified professional advice and the right software can go a long way toward making it a reality.

Report generation and financial statements

Cash inflows for construction companies largely come from accounts receivable. Unfortunately, many contractors struggle with accounts receivable management because they don’t maintain proper documentation or fail to make this documentation available to accounting or financial staff in a timely manner. Subsequently, cash flow suffers.

Timely reporting plays a pivotal role in cash flow management for both construction and real estate companies, offering insights into accounts receivable and identifying potential cash shortages early.

Choose regular, specific dates to generate accounts receivable reports and ensure those reports are automatically distributed to pertinent employees such as your fellow owners, CFO and project managers. Also, set up monthly meetings to discuss accounts receivable and strategize collections.

Strong financial reporting — including generating financial statements in accordance with Generally Accepted Accounting Principles (GAAP) — is another key. After all, along with the income statement and balance sheet, a statement of cash flows is an essential part of GAAP-compliant financial statements. It specifically describes all cash inflows and outflows, whether from operations, investments or financing activities. This is important, insightful data.

Of course, many businesses create a full set of financial statements only once a year. So, be sure to augment your statement of cash flows with more regular cash flow reports. Monthly is common.

Critical function

It cannot be overstated how important cash flow management is for construction and real estate companies. We’ve touched on just a few fundamentals in this article. Whether you run a construction business or a real estate development firm, cash flow management is key to success. Contact our firm for expert guidance on optimizing your financial strategies.

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