A Complete Guide to Construction Cash Flow (And How to Improve It)

By Haley Davidson

Founder & Content Strategist, Gaia Content

Successful construction companies leverage cash flow management strategies to maintain healthy profit margins. But it’s no secret that construction project expenses can add up fast, requiring contractors to cover upfront costs like equipment, raw materials, and labor. 

If you aren’t properly planning for these expenses, you could be left with negative cash flow. 👎 But here’s the good news: if you’re struggling with construction cash flow, there are a few money management strategies that can help improve your financial situation. 🙌

In this article, we’ll discuss ways to manage (and improve) your construction business’s cash flow. We’ll also cover:

What is construction cash flow? 🏗️

Construction cash flow refers to the money that moves in and out of a construction company during a specific period of time. For example, you could look at inflows of revenue and outflows of expenses over a week, month, year, quarter, or season. 

You can put together a cash flow statement to see how well your construction company manages cash flow. 💸 A cash flow statement shows how much money flows in and out of your business over time. It also lists where that money is coming from and shows where it’s going.

If you want to analyze your construction company’s cash flow, there are several different revenue streams and expenses to consider.

Construction company income streams 📈

Your revenue sources may include:

  • Construction projects

  • Equipment rentals

  • Subcontractors

  • Investments

  • Consulting

  • Company property

  • Maintenance

You’ll need to add all your income streams to understand the money flowing into your business. But if you want to know your bottom line, you also need to list your expenses.

Construction company expenses 💰

Your expenses may include:

  • Upfront project costs

  • Labor

  • Raw materials

  • Equipment

  • Insurance

  • Marketing

  • Utilities

  • Fuel

Finding the difference between your revenue and expenses will tell you the amount of money coming in and out of your business. You can use this information to identify cash flow trends and anticipate sales slumps. 🔍

For example, you may see that you have more revenue during the summer months ⛱️ than you do during winter. ❄️ If that’s the case, you may need to save money or cut costs to ensure you have enough cash to cover expenses during slow periods. 

Relay (that’s us! 👋) is an online business banking and money management platform that gives small business owners greater visibility into both income and expenses. With Relay, you can organize cash flow across 20 individual, no-fee checking accounts and view detailed data about all your transactions. 

Instead of wondering whether you have enough money set aside for projects, Relay helps get a clear view of your budget at a glance. You could open a dedicated account for different types of expenses or even specific projects. Learn more about banking with Relay here

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Positive cash flow vs. negative cash flow

Cash flow can either be positive ➕ or negative ➖. A cash flow analysis can reveal whether your business has positive cash flow or negative cash flow.

If more money is coming into your business than leaving it, you have a positive cash flow. But if you’re spending more money than you make, you have a negative cash flow.

Surplus cash allows you to invest in your construction business, pay down debts, and save for future projects. That’s why you want to aim for a positive cash flow. 🙂

On the other hand, negative cash flow means that you’re spending more than you make. Cash flow problems could force you to open a new line of credit or delay project timelines. Unfortunately, interest adds up quickly, and project delays can lead to payment delays. That’s why you want to avoid having a negative cash flow. 🙁

Cash flow vs. net profit

Keep in mind that cash flow and profit are two different things. Cash flow refers to the money flowing in and out of a business during a certain amount of time. Profit is the amount of money left over when you subtract all of your expenses.

Cash flow vs. working capital

Working capital and cash flow are two key ways to gauge your construction company’s financial health. Working capital is the difference between your current assets and your current liabilities. Simply put, it’s the money your business uses for day-to-day operations. 💵

If you have a negative cash flow, you’ll have less working capital. But, a positive cash flow means you’ll have more capital to fund your short-term operations. 

Common cash flow issues for construction companies 🛑

Construction companies often foot the bill for a project’s upfront costs. That’s why it’s vital to maintain a positive cash flow. But if you’re struggling to get ahead and stay ahead, you’re not alone.

One survey found that 84% of construction companies have experienced cash flow issues. Of those respondents, 17% said they experienced cash flow issues every month. 

Here are some common cash flow problems that can affect your construction company’s finances:

  1. Supply chain issues: Practically every construction project requires the purchase of raw materials. But, sudden price increases or supply chain disruptions can drive up costs and delay your project timelines. ⛓️

  2. Poor cash flow forecasting: Without accurate cash flow forecasting, it’s difficult to make informed decisions about your business's financial health. Reviewing your cash flow over months and seasons can help you identify cash flow trends. This information can help you anticipate slowdowns and better manage cash surpluses. 😕

  3. Delayed payments from clients: Construction projects typically have long payment cycles, leading to delayed payments. Late payments can leave you over-leveraged and affect your company's cash flow. 💵

  4. Overestimating profit margins: It’s hard to know how much money you have if your finances are disorganized. Construction accounting mistakes, like overestimating profit margins, can lead to inflated budgets and insufficient funds for project completion. 💰

  5. Unnecessary overhead: Construction companies have high overhead costs, including equipment, labor, and material expenses. Overestimating the overhead you need can drain your budget and cut into your profitability. On the flip side, underestimating your overhead can lead to project delays and strain your cash flow. 🛠️

  6. Project delays: Project timeline delays lead to payment delays. A lack of cash flow could leave you unable to pay your employees or start new projects. ⏰

  7. Slow construction accounting process: You can’t get paid until you send an invoice. If you wait until a project is completed to bill your client, you could wait several weeks or months for payment. If you don’t have enough cash to float your operating expenses while you wait, you may have to take on more debt. 🐌

  8. Mismanaged inventory: Purchasing too much inventory reduces your cash flow and leaves your construction company vulnerable. Add in maintenance and storage fees, and you can see that these costs add up quickly. 📈

  9. Poor expense management: Change orders are a common practice in the construction industry. That said, you need to document anything that changes a project’s costs or timeline. If you aren’t tracking increased expenses or timeline delays, you might be underbilling your clients. These accounting mistakes can affect your cash flow. 😬

  10. Fronting costs: Fronting project costs ties up your cash flow and puts your company in a financially vulnerable spot. 😰

  11. Not having an emergency fund: Unplanned expenses, seasonal slowdowns, late payments, and project delays can all disrupt a construction company’s cash flow. But a healthy business savings account lets you fund operating expenses without taking on debt. 🚨

How to calculate construction cash flow 🏗️

Calculating cash flow may seem intimidating at first, especially as a small business owner.  The simple formulas below will help you get clear on your business’s cash flow and financial health. Remember: to improve your cash flow, you have to know where you’re starting from. 

There are a few different types of cash flow construction companies should track to monitor their financial health:

Basic cash flow formula 

This cash flow formula subtracts cash outflows from cash inflows. It factors the other three different types of cash flows into the equation: operating cash flow, investing cash flow, and financing cash flow. 💸

Here’s what it looks like:

Basic cash flow = cash inflows - cash outflows

Operating cash flow formula

Operating cash flow refers to the money generated from a business’s operations. In this case, operating cash flow refers to the revenue generated from construction projects. 🚧

You can use the operating cash flow formula to see the difference between your revenue and operating costs. This formula doesn’t factor things like investments into the equation:

Operating cash flow = operating income + non-cash expenses + change in working capital

Investing cash flow formula

Investing cash flow refers to income produced from investments. Let’s say you buy a new truck or forklift. This new equipment allows you to expand your operations and bring more cash into your business. 💵

The investing cash flow formula shows you how investments affect your cash flow over time. For example, you can use it to see whether equipment sales are a viable way to fund upfront project costs, labor expenses, and more.

Investing cash flow = purchase/sale of capital expenditures + purchase/sale of marketable securities + business acquisitions (the investments you bought) - business divestitures (the investments you sold)

Financing cash flow formula

Financing cash flow refers to funds that a construction company’s owners, investors, or lenders bring into the business. Debt, equity, and dividends are examples of cash flow generated from financing activities. 🏦

Use the financing cash flow formula to see how financing sources affect your company’s cash flow:

Financing cash flow = issue/repayment of debt + issue/repayment of equity - (dividend payments + debt repayments)

7 ways construction companies can improve cash flow

Managing construction cash flow is no easy feat. Here are seven ways to improve your business’s cash flow and boost your bottom line. 

Implement the Profit-First method 💸

The Profit First method for contractors is a cash flow management system that prioritizes profit over expenses. It’s designed to help construction companies increase profitability and improve cash flow.

You can implement this method by allocating a percentage of revenue to profit before any money is put toward expenses. Start small by putting 1% of your revenue for profit, then increase your profit allocations over time.

Prioritizing profit gets construction companies out of the habit of fronting expenses and looking for profits after work is complete. This approach can help create a sustainable spending strategy that protects your bottom line. 🤑

Let’s say your company allocates 25% of revenue to profit. If a construction project brings in $100,000 in revenue, your profit would be $25,000. That leaves you with $75,000 to budget for expenses—like labor and raw materials.

When you preemptively set a profit margin, you know exactly how much money you’re working with. That’s how the Profit First method can help you budget your money, stay on top of spending, and avoid cash flow crises. 

Try cash flow forecasting 📊

Cash flow projections can help you identify cash flow trends. For example, a cash flow forecast may show that you typically have a surplus of funds in the summer months or less money available during winter. You can use this information to budget your small business’s operating expenses and adjust spending for seasonal cash flow fluctuations.

Set clear payment schedules 🗓️

The construction industry has notoriously long payment cycles. If you cover upfront costs, you may have to float those expenses for 90 days or longer. 

To address this issue, you can break a lump sum payment into smaller invoices and request payments on a rolling basis. For example, you can ask for net 15 or net 30 payments. You can also outline project milestones and request payment as you meet each one.

Optimize your accounts receivable process 🔄

Overbilling or underbilling clients can delay payments. But accounting software can help you track expenses, create invoices, and send customer payment reminders. Implementing an accounts receivable schedule can also help you create consistent cash inflows.

Review your budget 🕵️

Construction companies have high operating expenses. Regularly analyzing your financial statements can help you see how well you’re sticking to your budget. 

If you spend too much on operating expenses, you can always cut back on labor or raw material costs. On the other hand, if you’re bringing in more revenue than expected, you may want to increase your emergency fund savings.

Give customers more ways to pay 💳

Offering customers multiple payment options, such as credit card payments, wire transfers, or ACH payments can help speed up the collection process. It also reduces the risk of late or missed payments.

Leverage technology 💻

Digital tools, such as project management services and construction accounting software integrations, put you in control of your cash flow. Leveraging technology will give your construction company real-time financial insights so you can make informed decisions.

Improve construction cash flow with Relay and Profit First

In the construction industry, projects can have high upfront costs and ever-changing timelines. The right banking platform will give you the tools your construction company needs to thrive. 

That’s why Relay's online banking platform helps construction business owners and contractors stay on top of cash flow with features like: 

  • 20 free checking accounts: Relay doesn’t charge overdraft fees, maintenance fees, or require a minimum account balance.

  • Earn 1% to 3% APY1 on your savings: Open two savings accounts with Relay and watch your money grow. Plus, our auto-transfer rules help you consistently move excess cash out of operating accounts and into savings.

  • 50 physical or virtual debit cards: Relay’s debit cards give you total visibility into spending with ultra-rich transaction data. You can use your cards to organize spending by category, team member, and beyond.

  • Streamline bookkeeping with accounting integrations: No more tax season headaches. Relay’s integrations with QuickBooks Online and Xero help you waste less time deciphering transactions, and more time growing your business.

  • Official banking platform for Profit First: Relay makes it easy to implement Profit First with multiple, free checking accounts and percentage-based transfer rules.

Are you ready to take control of your construction cash flow? Sign up for Relay today.