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Cash Flow, Why You Need it.

Where’s the cash?

This question is common in the construction industry, and even profitable companies can have cash flow problems.  Lack of control over cash flow has been a major factor in the high percentage of companies going belly up in the industry; therefore, it is a subject that should be taken seriously by all.


Contractors go out of business because they run out of money, not because they run out of work.


Contractors that are about to start a big project or a lot of new work are especially at risk. What is the cash flow impact of this new work? How much of an investment will the company need to make before the project(s) produce positive cash flow?  Is something every company should be asking themselves.


Cash flow planning is that planning on how cash moves into the production process (Draws), then into accounts receivable (Collections), and back into cash. By compressing this cycle into the shortest period possible, a company can create more leverage for every dollar of working capital in the company. Note: Smaller or shorter draw schedules help in a number of ways.  

Preparing a cash flow plan is an attempt to forecast the flow of cash during a future  amount of time. In my experience, companies with the most control over this process are the ones most likely to be in business ten years down the road.

Cash flow problems can be caused by a number of factors, many of which are unrelated to job profits. Examples include:

  • Labor-intensive work or Change Orders that aren’t billed or recovered
  • Payments made to suppliers or subcontractors before receiving cash payment from the related project
  • Retainage (Holding a percent at the end and actually collecting it in a timely manner)
  • Cash purchases of fixed assets (Buying equipment, tools, etc. needed for the job)
  • Time lags between billing and collection of receivables (slow payers)
  • Internal time lags between end of the time period and submittal of requisition
  • Investments in other ventures or projects
  • Cash used for outside investments
  • Cash advances or loans to officers or employees
  • Overstock of inventory (buying more than you need or can sell in a time frame)
  • Unfavorable legal settlements (Going to court to collect on unpaid projects/service or materials)


Read on to get more of an understanding.


Cash flow problems can be controlled if they are identified and addressed early.

Ignoring, cash flow can result in increased interest rate, increased investment of capital, bad credit ratings, inability to take advantage of new opportunities and failure of the business.  It’s not an exact science, but proper cash flow planning can help a business make good decisions.

To get the most out of cash flow and income, use data to implement and monitor cash flow should be part of the contractor’s procedure for estimating and bidding projects and for scheduling and monitoring performance on contracts that are in process.

Project planning is fundamental to the task of preparing a cash flow analysis.

For example, I  have seen clients who were experiencing cash flow difficulties. As they examined their contracts, they noticed how activities were billed and identified losts opportunities to improve cash flow.


Common things that Drain Cash Flow

Some common things that drain a contractors’ cash flow include:

  • Not closing out completed projects. This can result in final change orders not being paid and holds up payment of final retainage.
  • Not having standard procedures to issue invoices on a timely basis. Some commercial accounts pay within forty-five days, yet the contractors’ average days of accounts receivable is more than seventy-five days. This means that thirty days of the cycle are within the company’s control.
  • Assuming there is nothing a company can do to speed up collections.  Customers need to be reminded that they owe you money and that you haven’t forgotten about them. Persistent phone calls, emails and letters are a must.

Cash Flow Strategies

While planning and going over the numbers frequently are important, there are also many simple action steps companies can take to improve cash flow, boost cash reserves and strengthen borrowing capacity.

You can schedule payments by a due date, considering the relative costs and benefits of any available discounts for early payment-mail checks as late as possible, but avoid late payments.

When bidding a job, evaluate the cash flow impact of payment terms and retention releases. You can negotiate any appropriate change before the contract is signed. You must plan the way a job will be billed before it starts.  Although overbilling can improve cash flow, too much overbilling may mean that a contractor is borrowing from one job to pay for another.  You must always avoid job borrowing, because if one doesn’t pay, you then have two or more projects with cash flow problems and that is when most companies get into trouble.

Also, avoid underbilling.  This will handicap your cash flow too.

Manage your cash flow better to have a successful construction business.

  • Establish an adequate credit line with a bank
  • Secure long-term financing for fixed asset purchases
  • Consider leasing or renting rather than purchasing
  • Make sure that delayed payments (e.g., collections and delinquent change orders) include increases for the cost of the cash.  (Late payment surcharges)
  • Consider depreciation methods for tax purposes that accelerate deductions and decrease tax liabilities (A good CPA or a must)
  • Tax planning is important-understanding the tax impact of various activities and strategies is key to your business and can free up cash.

Cash flow is just as important to a contractor’s business as profitability.

I know this article is a bit off of my line of work (Marketing/Copy Writing), but the success of your business is important to me.

Coop’s Tip:

Marketing can help with cash flow.  If you have larger projects going, marketing for smaller, faster paying projects may be the difference between cash on hand, until the big pay day or starving until then.

Let me know what you think in the comments section.

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Here are some other sites to view for getting a better understanding of Cash Flow.

Mark up and Profit

Cash Flow Accountablity

















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