Cash Flow in Construction

Managing cash flow in construction can often feel like an uphill battle. With so many moving parts, fluctuating costs, and unpredictable timelines, it’s easy to fall into cash flow crunches.

But cash flow problems are often symptoms of a deeper problem. They’re not usually the cause themselves. Understanding this can help you get to the root of issues in your business and build a steadier, more predictable financial foundation.

Later in this article, we go through a range of solutions to dealing with a cash flow crisis. To begin with, we are going to work through some of the root causes of cashflow problems.

Cash Flow as a Downstream Symptom

When you experience cash flow issues, it’s tempting to think it’s simply because you don’t have enough cash on hand. But, in reality, these problems often come from further up the chain. For example, it may be that they are caused by poor job costing, estimating errors, or project delays.

Essentially, cash flow is a by-product of profit. If your profit margins aren’t as healthy as you thought, your cash flow will take a hit. By addressing these upstream issues, you can protect your cash flow and avoid nasty surprises down the line.

Why Cash Flow in Construction Problems Tend to Crop Up

There are a few common culprits that can make cash flow tricky in construction businesses:

• Overestimating Profit: One of the biggest mistakes builders tend to make is thinking a job will bring in more profit than it actually does. This can happen because you haven’t properly considered the scope of the project, you have incorrect pricing, or a range of other flaws in your estimating process. If you overestimate your profits, you may not have enough cash to cover costs when the bills roll in. These mistakes can often result from inaccurate estimates, poor or non-existent job costing and not having a robust budgeting process.
• Project Delays and Price Increases: Construction projects are full of surprises. Whether it’s delays due to bad weather or unexpected price hikes in materials, these can all mess with your cash flow. When projects stall, the costs don’t stop—they pile up, leaving you with more to pay before you complete a stage and invoice the client.
• Profit Leakage and Hidden Costs: Without a clear view of your profit margins throughout your projects, costs can creep up without you noticing. Surprise invoices and sudden cost increases can eat into your cash flow, leaving you in a tight spot.
• Juggling Multiple Stalled Projects: Dealing with several stalled projects at once can be a major cash flow headache. Resources can be tied up, and it becomes harder to keep things moving. With cash locked into different stages of various projects, it’s easy to feel stretched thin.

Practical Tips for Managing Cash Flow in Construction

So, how do you actually get to that point where you’re in full cash flow control? Here are a few practical steps:

1. Use Job Costing Systems: In construction, tracking costs per project is key. By using job costing software and internal processes, you can keep a close eye on expenses and make sure you’re not losing profit without realising it. A good job costing system helps you monitor each project’s financial health in real-time, so you can make adjustments as you go.
2. Get Accurate with Estimates: A lot of cash flow issues start with the estimation phase. By improving your accuracy here, you can avoid underbidding and minimise nasty surprises later on. Using digital tools and historical data can help you refine your estimates, making them as close to reality as possible.
3. Keep an Eye on Your Financials Regularly: Financial visibility is crucial for cash flow management. You need to know what’s coming in and going out, and how your projects are performing. Regularly checking key metrics like profit margins, expenses, and accounts receivable can help you anticipate cash flow needs and plan accordingly.
4. Stay on Top of Job Management: Monitor the progress of your projects closely, and tackle delays as soon as they come up. By managing projects proactively, you can avoid disruptions that might hurt your cash flow. Build a robust scheduling system and check in regularly to spot any issues before they become bigger problems.

Mindset Matters: Taking Control of Cash Flow in Construction

Controlling the cash flow in your construction business is not just about tools and systems; your mindset matters too.

Already in a cash flow crisis?

When you’re in the thick of a cash flow crisis, it can feel overwhelming, but there are immediate steps you can take to give yourself some breathing room. When you’re in this situation, cash really is the oxygen your business needs to survive, and the goal is to buy yourself time to rebuild.

Here’s some ideas of what you can do if you’re facing a cash flow crunch in your construction business:

1. Pull Forward Customer Claims: If possible, pull forward any claims or payments owed to you. By accelerating cash inflows, you can cover immediate expenses and stabilise your situation. This gives you the room you need to figure out the next steps without falling deeper into a financial hole.
2. Explore Borrowing Options: If you can’t cover short-term expenses, look into second- or third-tier lenders. These lenders may offer quick access to funds, helping you avoid missing payroll or paying overdue bills. Be cautious with this approach, as these loans often come with higher interest rates, so it’s a temporary fix rather than a long-term solution.
3. Look Into Government Support: In some cases, government programs may offer relief. For example, if you qualify for the Small Business Restructuring Plan (SBRP), it could provide a structured way to deal with debt while keeping your business afloat.
4. Leverage Personal Equity: Although this should be a last resort, using equity from your own home or other personal assets can help bridge the gap during a crisis. This is a risky step, so ensure you’re clear on your repayment plan and long-term financial strategy before committing personal assets to your business.

Once you’ve stabilised your business’ cash flow, you can start focusing on building a stronger financial foundation, addressing the root causes of past issues, and shifting from survival mode to long-term growth.

Building Cash Flow Resilience in Construction

Healthy cash flow in construction isn’t just about avoiding financial headaches—it’s about creating a solid foundation for growth.

By digging into the root causes of cash flow problems and putting the right practices in place, you can go from just surviving to really thriving. With a strong financial footing, you’ll be better positioned to take on new projects, invest in your business, and build a construction company that’s set up for long-term success.

Managing cash flow in construction might be challenging, but with the right tools and a solid approach, you can turn those challenges into opportunities. Take charge, and you’ll find that cash flow doesn’t have to be something that keeps you up at night. Instead, it can be the key to building a business that’s not just surviving but truly thriving.

How Can We Help?

Our team are specialists in the construction and building industry and deeply understand the complexities around cash flow in your business. Our CFO Advisory service offers high-quality, real-world and experienced strategic advice to help you move through the issues described above and into full control of your processes, efficiency and cash flow in your construction business – ultimately leading to growth and maximum profits!

Get in touch to have an initial conversation about how we can help improve the cash flow of your business.

Taking control means being proactive rather than reactive. It’s about thinking ahead, planning for the unexpected, and making decisions based on data rather than gut feeling. A disciplined approach to your finances can help you stay on top of your cash flow and make better choices for the long term.