In a recent study, a massive 82% of all businesses that fail ultimately cited cash flow issues as a major contributing factor. Not only does this have to do with the total amount of money coming into the business, but timing also plays a significant role. Businesses that operate on invoice-based systems, much like those in the construction industry, need to get paid by the customer before any loan payments come due. If they don't, they could easily face cash flow problems - and ones that will progressively get worse as time goes on.
Customer payments have always been an issue for construction companies, and the ongoing COVID-19 pandemic has only exacerbated things. According to the 2021 Construction Cash Flow and Payment Report put together by the experts at Levelset, only about 10% of construction businesses currently get paid in full. That's a massive 75% drop from just a year ago in 2020. Additionally, only about 9% of firms get paid on time at all - a catastrophic 60% decrease compared to a year ago.
This situation needs to be addressed at all costs as these are not the only financial risks that construction companies are exposed to. Luckily, doing so isn't necessarily difficult - but it will require firms to keep a few key things in mind.
By far, one of the best ways that industry executives can help expedite customer payments and manage financial risks involves offering payment alternatives that they're comfortable with. One trend that is picking up steam across the industry has to do with electronic payment methods. This can include wire transfers, credit cards, and even services like PayPal. By simply offering your customers as many alternatives as possible over traditional methods, it can help payments hit your accounts quicker.
Along the same lines, construction firms, can help speed up payments and reduce risk by prequalifying their customers whenever possible. Doing so requires them to verify that the customer is financially stable before any work begins and get them to show proof that they have a solid history of paying bills on time. By doing your due diligence, you know exactly what to expect ahead of time - allowing you to have access to all the actionable information you need to fully understand the relationship prior to engagement.
Prequalifying customers will also help clue you into situations where you can request down payments on work that has yet to be completed or request cash up front.
Beyond that, companies should use software solutions to help track and process payments as much as possible. These tools are more than just glorified spreadsheets - they put all customer payment information (and other relevant data) in one centralized repository that can be accessed at a moment's notice. They also help you embrace automation to save as much time and energy as possible. For example, suppose a particular payment is late, the software can automatically inform you - thus reminding you to take the next step and reach out to the customer as quickly as possible.
This in and of itself can be a great way to not only better understand your current financial situation but also to uncover trends and patterns with certain "problematic" customers that likely would have gone undiscovered. By creating a situation where you no longer must manually track all this information, it avoids errors too. Automation is a perfect opportunity to free up your valuable time to focus on those matters that need your attention, which is the most important benefit of all (beyond getting paid faster, of course).