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One of the most important impacts AI will have in construction is our ability to improve cash flow. Certainly the cash flow equation in construction is complex, but there are elements of that equation that can be improved. If we were to simplify the cash flow equation in construction, it may look something like this:
(Money In - Money Out) / Timing = Cash Flow
Let’s break this equation down to its components and identify where AI and automation can be applied.
Automating Accounts Payable and Receivable:
The most obvious places to start would be in handling accounts payable (AP) and accounts receivable (AR). These processes are often slow, prone to error, and a major cash flow bottleneck. AI changes the game by not only automating these tasks, it also improves the communication between the payables team, receivables team, and the field teams. For example, one of AI’s many components is a technology called computer vision, which enables the reading and understanding of PDF documents like invoices. This technology can receive an invoice in a PDF format, read the document, and automatically match items in the invoice with purchase orders. It can also automatically allocate costs in an invoice through the detection of key elements like a job number or a vendor. Over time, this system learns what kind of costs should be applied to overhead, to job cost, or even to change orders. By offloading more of this pattern recognition to machines, it allows for humans– such as a PM in the field or an AP clerk in an office– to approve costs and billings more quickly. It also frees the time of back office workers and field teams to focus on those vendors where invoices or billings may be incorrect, encouraging faster reaction times to rectify any issues. This equation is quite simple: faster AP processing means quicker payments and a more accurate view on cash. It may also help to save on early payment discounts and avoid late penalties. Quicker processing of receivables means getting paid faster, or at least never getting paid later than you should.
Optimizing Inventory and Resource Management
Another area where cash can get tied up is in inventory. Having too much on hand is bad for the balance sheet. Too little can delay your projects. A tool like AI can help anticipate resource needs based on work on hand and backlog. It can find a sweet spot by using data from past projects to predict exactly what you’ll need next. Using digital workers– essentially bots that act on your behalf– can reorder materials automatically when supplies run low. This keeps projects moving without extra costs for storage or last-minute buys.
Improving Project Billing and Revenue Recognition
Cash flow thrives on timely billing and smart revenue recognition. AI not only helps to automate the creation of a WIP or Billings Forecast– which generally live in Excel– but it also helps apply the percentage-of-completion method accurately based, and ensures revenue matches project progress. It can then automate data collection and billing, keeping cash inflows steady. AI also keeps your books in line with current revenue standards, making every financial statement spot-on.
Enhancing Accuracy in Financial Forecasting
Aside from the manual tasks that exist in cash flow-related workflows, dialing in your financial forecasting is a critical component to this. Forecasting the timing of when payments will be made against when payments will be received is challenging. There are too many moving parts, and as a result most companies don’t give it the time it deserves. And it isn’t enough to look in the rearview mirror in your financials, such as basic ERP reports. Instead, AI is excellent at detecting patterns at a scale that no company can do in a spreadsheet today. It significantly improves forecasting capabilities by utilizing machine learning algorithms that analyze historical data to predict future financial outcomes. It can also detect patterns in the timing of when payments are generally received based on bills going out the door. These AI systems can process vast amounts of past project data to forecast costs, revenues, and potential delays, providing financial managers with the tools to make informed decisions.
Risk Management and Mitigation
AI isn’t just about managing money. It’s also about spotting risks before they become expensive problems. It looks at patterns and past data to flag potential budget overruns or delays, which in turn allows you to tweak plans, budgets, and timelines early, keeping projects on track and cash flow uninterrupted. Using cash flow from one job to pay for the delays on another job is a classic issue that is a missed opportunity to increase working capital in the business. Bringing financial risks to the surface before they happen may not be a direct impact to cash flow, but it prevents the reactive measures that get used to shore up issues. Reactivity typically burns cash. AI allows you to be more proactive by automating the manual work in the business so you can focus on planning better.
The ability to manage and forecast cash flow accurately is a superpower that is necessary for staying competitive in a tough market. AI offers a path to smoother operations and better financial health in construction.
