Importance of Cash Flow During Supply Chain Disruptions in Construction
The COVID-19 pandemic has caused, among many other issues, supply chain disruptions. We all remember seeing lumber soaring to ridiculous heights, but continued product and labor shortages, port delays and production problems have also cause significant limitations in construction. With higher prices and harder-to-find raw materials, sales can start to fall back, if they haven’t already. Construction firms must evaluate their supply chain strategy and its impact on cash flow management if they are to remain profitable.
What’s Causing the Shortages?
There are several issues that are causing supply chain disruptions, including backed-up ports, raw material shortages that is reported to be faced by 71% of contractors, increased demand for new homes, renovations and DIY projects, and production delays due to material shortages. These issues can have a strong impact on your schedule, existing contracts and are even making some construction firms pass on work because of the extensive delays and high material costs.
The labor shortage is also causing serious problems, including construction labor as well as supply chain labor, such as truck drivers. Higher fuel costs are driving up the cost of shipping materials. Though many contractors have passed on these expenses and the related risks to their clients, others have branched out into alternative products or materials. Some companies have chosen to retain storage space and are ordering their main materials ahead for the next year to year and a half. Other businesses are simply refusing to engage in the volatile market, holding off on any new construction until the market settles down.
In this ongoing, unpredictable environment, contractors must look to cash flow management to mitigate risk.
Supply Chain Management to Reduce Risk
Before you start working on your cash flow, you will need to set up a solid strategy for risk management. It’s easy to sit back and make a guess, even an educated one, on what will happen next. It’s just as easy to react based on what could or could not happen in the market. You’ll get the best results from proactively looking at how your company is going to handle supply chain issues. There are several excellent places to begin:
- Review costs and processes to ensure you’re using the best and most efficient method. Look at variable and fixed costs for unnecessary expenses that can be cut to improve cash flow.
- Consider whether improved supply will also impact your labor availability. Once the materials are in hand, can you get enough workers for the project?
- Assess your most impacted suppliers, then find backup options for when they’re slow. Try to find nearby suppliers to reduce transportation costs or small suppliers for particular project needs.
- Keep in touch with frequent suppliers. Discuss what they’re dealing with, how they’ll adjust to the situation and if they can handle future material demands. If they can’t, ask for suggestions.
- Consider other work opportunities in the short-term that are not dependent on the supply chain. This could be a great time to branch out and explore other client types or projects.
Cash Flow Management Planning
Now that you have your supply issues in hand, it’s time to look at cash flow management, which should be a regular practice. Construction contractors should use cash flow forecasting to better plan, track expenses, reduce risk, budget and allocate your teams and equipment.
- Planning. Plan by identifying budget, construction milestones and similar constraints. Know what you’re working with and how to stay on track to meet those milestones.
- Tracking. Track by comparing estimated versus actual expenses, schedule and similar concerns. What’s different between projects completed early versus late? Look for scope creep in projects as well as unexpected expenses.
- Risk management. Manage risk by identifying and addressing risks as soon as they appear, whether this covers supply chain issues, cybersecurity, change orders, unexpected weather or labor issues.
- Budgeting. Stay on budget by managing both expenses and project revenue. It is crucial to work with cloud-based tech platform to get daily views of projected versus actual. financial performance. Owners and management should be able to access this information from any device and quickly and easily see real-time financial performance.
- Resource management. This allows you to stay on top of your current workforce to manage both today’s and tomorrow’s projects, long into the future.
When you’re projecting cash flow, it’s important to consider at least three scenarios, but perhaps more in uncertain times. Use the information derived from budgeting and risk management activities to make smarter decisions that are based on the data. Forecasting makes it easier to find the right times to buy or hold back based on labor, work delays or materials pricing.
You’ll also want to communicate with lenders, who can help you find cash-saving opportunities on debt services, while keeping track of lines of credit if the need arises. Use external accountants to find and develop working capital resources and cash flow strategies you may not have considered. Review billing and collections, undertaking a financial ratio analysis to check your performance against others in your industry. You can also revisit or set favorable billing terms with your suppliers for time between invoice collection and payment.
In any case, there are opportunities for cash savings, and even growth, but construction firms must be on the offensive with regard to strategic planning and financial management. These approaches can help you optimize your cash flow and supply chain, even during difficult times.
We’re Here to Help
If you have any questions or need help with cash flow projections or management, feel free to contact our Construction Team.