Accurate financial forecasts are critical to managing cash flow, setting realistic goals and budgets, and guiding essential decisions that help sustain and grow construction businesses. But, creating them is not always an easy task for construction finance managers (CFMs).
CFMs confront unique challenges when tackling the often time-intensive financial forecasting process, including identifying and accounting for project fade, burn rates, and backlogs associated with their industry.
Finance teams within construction firms are under steady pressure to improve their firm’s performance while also reducing costs, and they are often encumbered by processes and systems that don’t always integrate or make data easily accessible. What’s more, they are likely disconnected from those who run core business units, which leads to a lack of insights into key business drivers, and ultimately a not so accurate forecast.
The good news is, technology, along with best practices, can solve these problems.
Here are 5 tips to help you create a more effective forecast without struggle:
Make it a Collaborative Process
Forecasting isn’t a one-person effort, nor is it limited to those in the finance department. Making it a collaborative effort that involves leaders from across the firm will allow you to gather insights you may have otherwise been unaware of and address concerns unique to each discipline within the business.
Collaborative forecasting gives project managers full accountability for the activities that drive their budgets, incentivizing them to better manage their projects and teams.
Assumptions about external factors impacting your business like how much your market will grow or what new services your competitors may launch have no place in forecasting.
Instead of falling into an assumption trap, consider your backlog, the sum of your current work under construction (or Work in Progress (WIP)), and watch your burn off rate, the rate at which projects are coming to completion.
Leveraging standard WIP reporting that shows monthly project cost to date and estimated cost at completion will help factor in and account for new projects awarded and backfilled existing projects. It’s a far safer approach.
Leverage a Rolling Operating Cash Flow Forecast with Multiple Scenarios
Creating a rolling operating cash flow forecast, one that reoccurs on a monthly or quarterly basis, provides ongoing visibility, and improves your accuracy and ability to manage cash flow.
Make sure to take a project by project view, assessing performance based on each project, managing commercial risk and opportunity, and understanding both future cash position and potential funding needs.
Make Reforecasting a Norm
There’s nothing wrong with reforecasting. In fact, it’s a smart practice.
Creating rolling forecasts and budgets, as opposed to a one-and-done annual forecast, allows you to adjust based on present performance and trends, rather than depending on forecasts built on predictions you made months ago.
It also enables you to pivot when needed, so critical decisions are based on what’s happening now. You can better align budgets and improve your accuracy, playing a more valuable role within your organization.
Automate the Processes
Think of how much time you’d save, time that could be better spent, and adopt automation technologies to handle the manual processes of your role, including the data collection and collaboration involved in forecasting.
Automation gathers data from across your firm and enables everyone involved in the forecasting process to collaborate via a cloud-based platform. They can access it from anywhere, at any time, saving you from chasing data.
It can also generate reports business owners need, when they need them, and transform your entire organization and your customers’ by replacing inefficient payment processes with electronic invoicing and payments.
In addition to saving time, you’ll save money, improve accuracy, enhance security, and gain better visibility into data and insights that can significantly impact your business.
For more information the time-saving benefits of AP automation, check-out our recent blog post.