How to manage and improve your construction cash flow (tips + benefits)

Construction cash flow is the lifeblood for any business in this industry. Project timelines are dependent on the health of a construction company’s payment processes.

If a company experiences negative cash flow, it can hinder project completion and endanger contracts. To keep projects on track – and homeowners happy – it’s important to effectively manage and maintain a positive cash flow throughout the construction process. The difference between success and failure often rests on the ability to effectively manage your payment processes.

What is cash flow in construction?

Cash flow refers to the movement of money into and out of a construction project over a specific period of time. It’s a crucial aspect of managing a construction business or project. Effective cash flow management is crucial for the success and sustainability of construction projects. It helps ensure that there are sufficient funds available to cover expenses and that the project remains financially viable from start to completion.

Some key points to consider for cash flow include inflows, outflows, timing, budgeting, forecasting, contingency planning, working capital management, project phasing, payment terms, financial tools and software and risk management.

The importance of cash flow for the construction industry

In the construction industry, project management timelines are often made up of many layers of dependent work. Drywall installation can’t happen before electrical lines are run, for example.

While some expense payments may depend on subcontractor agreement terms – which allow for construction companies to hold off paying subcontractors until they receive payment from the homeowner – it’s still common for construction companies to pick up the tab on large expenses continuously through a construction schedule.

Without a positive cash flow to cover these expenses, project timelines can derail, causing overruns and narrowing profit margins. 

What are some early signs of cash flow problems?

Cash flow can create problems when a construction company doesn’t have enough to cover costs when bills are due.

Even though cash flow is critical in this industry, construction companies face more cash flow challenges than almost any other trade. In most instances, cash flow problems can point back to four early warning signs.

Slow payments from clients

If clients are taking longer than expected to make payments, it affects cash flow. While this may seem like a problem that’s out of your hands, late payments often can be traced back to issues in the construction billing process. If you’re using spreadsheets and paperwork to track payment schedules and work schedules, you’re probably slowing down your own billing cycle and affecting cash reserves.

Material and equipment shortages

Shortages in materials and equipment can result in project delays, increased costs and cash flow issues. If a delivery is on hold, then the next steps in your construction schedule can get pushed back. This also affects your ability to invoice clients for work completed until those materials can be in hand. In some cases, your expenses might even go up as you work to expedite shipping or resort to making additional purchases to keep projects moving.

Overhead expenses

Overhead expenses – such as rent, utilities and insurance – can put strain on a construction company’s cash flow. Because these tend to be indirect costs – meaning it’s more difficult to tie them back to a specific construction project – they can have more impact on profit margins. If you have multiple projects in the construction phase at the same time, for example, you may have to rent multiple sets of equipment at the same time to keep up with set timelines. These large expenses can add up to drain your cash on hand.

Inaccurate budgeting

Inaccurate construction budgeting is one of the biggest causes of cash flow issues. Inaccurate estimates lead to surges in hidden costs, which can quickly move a construction accounting ledger from black to red. Accurate budgets detail all incoming expenses, leaving room for construction contingencies to absorb surprise costs without wiping out cash reserves.

No two projects are the same – even the best estimates can’t factor in every unforeseen issue.  Profitable companies can also experience periods of time when their debts are due before they’ve collected enough money from sales to cover their bills. By establishing processes to monitor these four warning signs, you can lessen the odds of running out of money before payday comes due.

Top 5 benefits of having consistent cash flow in construction

Having a positive cash flow is essential for the operational efficiency of any construction project. Here are five ways in which a positive cash flow benefits a construction business overall.

1. Cash to pay for labor and materials

Positive cash flow can increase your purchasing power. The construction industry has recently seen shortages of both labor and materials. With more cash on hand, you have the ability to request large orders from vendors, which may secure your order fulfillment if the supply chain is disrupted for any reason. You also have more flexibility to offer incentives to secure suppliers or labor, such as paying upfront or within a shorter time frame.

2. Improved financial planning and forecasting

If you’re constantly using incoming client payments to fulfill the next bill, you’re not going to see any long-term profitability. Having a consistent cash flow ensures you’re able to more accurately plan resources around anticipated expenses, without always playing catch-up on previous bills.  

This may also help your company take on more projects faster. If you have a strong financial plan in place and enough capital to cover the costs of a new project, you could expand your revenue streams even as other projects aren’t quite finished up.

3. Stronger relationships with stakeholders

When you’re paying your subs, employees, vendors and other stakeholders on time, you can establish a reputation as being a good company to work with.

As the industry continues to deal with worker shortages, it’s estimated more than 342,000 new workers will need to be hired to keep up with demand. If you’re known as the company that always pays on time, it may increase your chances at securing these relationships when the rest of the competition is trying to hire these workers.

4. Credibility with lenders

If you’re in need of construction loans, it may be easier to secure financing if you can prove you can maintain a consistent cash flow. Lenders and investors often require financial statements so they can decide whether you’re a risky client.

5. More operational efficiency

Construction software improves operational efficiencies by aligning teams and driving growth in simple, easy-to-use ways. The ability to invest in technology depends on you having enough cash to be able to prioritize these indirect costs.

With improved operations, your construction company can leverage budget allocations, hit deadlines, ensure profitability and keep customers happy. All of these factors are vital to the long-term success (and financial wellbeing) of your construction business.

6 tips to improve your construction company’s cash flow

With the right tools and strategies, getting paid doesn’t have to be a pain. Here are six tips to help you speed up your construction cash flow.

1. Calculate your ideal working capital

The working capital formula is pretty basic. Just subtract your current liabilities from your current assets. This can help measure if you’re able to cover your bills and keep your business moving forward.

Another way to calculate short-term financial health is through the working capital ratio. This is calculated by dividing current assets by current liabilities. If the ratio is greater than or equal to 1:0, that’s typically an indicator that a company can manage short-term finances. Depending on the size of your business, working capital ratios between 10:1 and 20:1 are recommended.

2. Send invoices out immediately

Nobody likes forking over their hard-earned cash – especially when it’s for something as expensive as a six-bed, four-bath house. So, it’s important to keep in mind: Clients aren’t going to pay you until you ask for it. If your invoicing process is slow or inconsistent, it’s costing you money.

Project management software can make sure you’re collecting as quickly as can be.

Buildertrend digitizes invoices and leaves snail mail behind. With this leading platform’s Invoice feature, create an invoice from scratch, from a template or from an estimate, expense, change order or selection choice. Then link due dates to the Schedule so you get paid on time, every time.

Buildertrend also has a Change Order tool. This keeps your cash flow moving when a project requires more time, money or resources than originally thought. Process these right in our system as change happens – rather than waiting until a project is complete.

3. Incentivize clients to pay early

To move your construction cash flow in the right direction, give clients a reason to pay early.

Consider putting new payment policies in place and work them into your contract so the payment terms are clearly defined and everyone knows what to expect. These types of offers can also help you win over potential leads and grow your business.

Sometimes building the foundation of construction cash flow success begins far before the construction itself. That’s why you should also consider doing some research before agreeing to do business with a client. Look for a history of late payments, being delinquent on bills or other red flags.

4. Market smarter, not harder

Don’t ever underestimate the power of construction marketing. The best way to bring in more money is by bringing in more clients.

Big marketing moves don’t have to cost big dollars. We know many residential builders are small family-owned businesses – every penny counts. Consider social media, email blasts or optimizing your website. These low-budget marketing ideas for construction can see a high return.

5. Gain better visibility to your cash cycle

You can’t manage what you don’t measure. That’s why every construction company needs the right accounting practices and financial information to identify if its project cash flow is healthy.

Organized and accurate financial processes help business owners make informed decisions that grow companies. It’s all about having visibility into how each dollar is coming in and going out. Buildertrend financial tools like the Budget and QuickBooks integration help teams achieve this.

6. Accept electronic online payments

Make project management software your one place to pay and get paid with Buildertrend Payments.

This is the proven way to boost your cash flow quickly. We’ve got the research to back it up.

Our proprietary data shows it takes Buildertrend customers 42 days on average to get paid manually by check. When they take things online, our builders get paid 16 days faster. That’s more than two weeks. In that time, they can keep projects moving, and they’re not waiting on capital to keep pushing forward.

Right from our system, you can send invoices or change orders and your clients can log in to accept and then immediately pay. This is your financial process streamlined and simplified.

“Online payments helped with cash flow and getting paid faster. You’re able to view project summaries for each job and see the original contract price, change orders that have been applied and payments the client has made toward the contract.” – Michael Krueger, Krueger Brothers Construction

Get started with Buildertrend

Cash in. Cash out. If only construction cash flow was that simple. With Buildertrend’s construction company software, it is.

Buildertrend offers many features to directly combat those early warning signs of poor cash flow.

Speed up client payments with Buildertrend Payments

As mentioned, with this feature, clients can pay from anywhere at any time with the convenience of their mobile phone. As the general contractor, you’re able to send payment requests at any point in the project, which ensures you’re in turn able to retain a positive cash flow and fulfill your own bills per subcontractor.

Improve the procurement process with bids and purchase orders

Track and manage your expenses – including setting limits on spending – by requiring purchase approvals before any materials hit your expense sheet.  With Buildertrend’s purchase order software, you can ensure faster project sign-offs, fewer overages and overruns and seamless invoicing prep.

This functionality offers the added benefit of giving real-time insight into profitability. By tracking ROI metrics such as supply, material and labor costs per contract, you can get a clear picture of profitability and supporting cash flow projections.

Improve construction budgeting

Buildertrend’s construction budgeting software connects cost code systems with estimates to establish clear budgets from project start.

As a project moves from planning to execution and closeout phases, our construction budget modules can help identify areas in need of adjustment. It makes it easier to review and manage cash reserves on an ongoing basis. That way, you can make adjustments as needed throughout a construction project, instead of finding out at the very end that your project wasn’t profitable after all.

Decrease overhead expenses with construction management software

Buildertrend’s construction management software is built to make your work simpler. It automates processes, establishes a single source of truth for documentation and project information, and connects your sales processes, financials, project management and communication into one system.

“On average, Buildertrend has reduced time spent on communication by nearly 50% between field and office workers. Plus, builders who’ve used Buildertrend save about $450,000 over a five-year period. Do you want to grow and scale your company? Buildertrend is the way to do that.” – Rachel Wieser, Buildertrend training expert

Consistent cash flow management and better all-around financial management doesn’t have to be hard. At least, not with Buildertrend.

Get started with Buildertrend’s construction company software and schedule a demo today.

Construction cash flow FAQs

Get answers to the most common construction cash flow questions.