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💸 Cash Flow Management

More construction companies fail from cash flow problems than from lack of work. Understanding and managing cash flow is essential.

Key Principle

Revenue is vanity, profit is sanity, cash is king. You can be profitable on paper and still go bankrupt.

Construction Cash Flow Challenges​

Why Construction Is Different​

  • Long payment cycles — 30-90 days from invoice to payment
  • Front-loaded costs — Pay for labor and materials before you get paid
  • Retainage — 5-10% held until project end
  • Seasonal patterns — Work and payments vary by season
  • Large swings — One big project can distort everything

Common Cash Crunch Scenarios​

  1. Fast growth (need cash to fund new work)
  2. Slow payments from one large client
  3. Unexpected project costs
  4. Retainage piling up
  5. Seasonal slowdowns

Managing Inflows​

Bill Promptly​

  • Submit pay apps on the due date (not after)
  • Include all required documentation
  • Follow up on approvals
  • Track payments received

Get Paid Faster​

  • Negotiate shorter payment terms
  • Offer early payment discounts (2% 10 net 30)
  • Accept credit cards for small jobs
  • Require deposits on new work
  • Progress bill frequently

Collect Aggressively​

  • Call on day 31 if not paid
  • Have a systematic collection process
  • Don't let receivables age
  • Use lien rights when needed

Managing Outflows​

Time Payments Strategically​

  • Pay vendors when due (not early)
  • Negotiate extended terms with suppliers
  • Use credit lines for timing gaps
  • Prioritize payments carefully

Payment Priority​

  1. Payroll (always)
  2. Payroll taxes (penalties are severe)
  3. Key suppliers (maintain relationships)
  4. Insurance/bonding (maintain coverage)
  5. Subcontractors (maintain relationships)
  6. Other vendors

Control Spending​

  • Approve all purchases over threshold
  • Track job costs weekly
  • Address overruns immediately
  • Question every expense

Cash Flow Forecasting​

13-Week Cash Flow​

Track weekly:

  • Beginning cash
  • Expected inflows (by source)
  • Expected outflows (by category)
  • Ending cash
  • Line of credit balance

What to Include​

Inflows:

  • Customer payments (by invoice)
  • Retainage releases
  • Other income

Outflows:

  • Payroll
  • Payroll taxes
  • Subcontractor payments
  • Material payments
  • Equipment
  • Overhead
  • Debt payments
  • Owner distributions

Building Cash Reserves​

Target Reserves​

  • Minimum: 2 months operating expenses
  • Better: 3-6 months
  • Ideal: 6+ months

Building Reserves​

  • Retain profits (don't distribute everything)
  • Set aside a percentage of each payment
  • Build during good times
  • Protect reserves (separate account)

Lines of Credit​

When to Get One​

  • When you don't need it
  • Easier to obtain when things are good
  • Have it ready before the crunch

How to Use​

  • Short-term timing gaps only
  • Pay down regularly
  • Don't use as permanent capital
  • Track usage carefully