How to Calculate Construction Company Cash Flow

If you want to maximize cash flow potential, send invoices ahead of time. Even if you conduct ‘perfect’ pre-project cash flow analysis, variations and change orders can quickly shift your plans and cash flows. As we have already mentioned, there are some major underlying and plaguing cash flow issues in the construction industry.

This can make cash flow tricky, and limit how much you’re able to spend at certain times. Identify the best times to spend your cash, and the best times to save it with a cash-in and -out timeline. To produce a basic cash flow forecast, simply subtract the cash outflows from the cash inflows. Compare the money flowing in and out of your business at different time points, to identify when you’ll have a surplus of cash or a potential shortfall. Construction cash flow forecasting shows you what your future business or project finances could look like by mapping your income and expenditure over a certain period. Cash flow forecasts can help you predict when you’ll have surplus income or a potential shortfall.

Improved financial planning and forecasting

Saying that a company’s cash flow issues stem from plain mismanagement is grossly simplifying the problems that can cause businesses to be in the red. Towards the end of a project, subcontractor fees, invoices, inspection fees and construction cash flow finish materials are due all at once. If you front-load payments or don’t track outstanding bills, you may find yourself undercapitalized. Spreadsheets don’t give you the overview and detail that you need to do this easily.

On the other hand, profits represent money that’s a more permanent part of cash flow. Until and unless the money is spent on expansion, investment, or other things like investor returns, profit doesn’t need to leave the bank account. It can also be used to solve negative cash flow during lean times, such as a recession or when there are invoice collection issues. There’s a good chance you’ll be paying for materials and labor up front, but receiving payments in installments.

What is a cash flow projection?

It is an important business metric as it determines how much money you have on hand after you subtract your expenses (money going out) from your income (money coming in). Essential for precise budgeting and efficient resource allocation in construction projects. Sometimes the scope of a project changes and you need to revise the original estimate. Change orders are common, but they often mean additional costs for you and your customers.

This strategic foresight not only stabilizes cash flow but also ensures the continuity and financial health of construction projects, even under unpredictable circumstances. Utilizing sophisticated project management software that is fully integrated with an accounting system offers a streamlined approach to cash flow management. This integration allows for the seamless automation of financial transactions, including meticulously tracking invoices issued to clients and their reconciliation with the project’s incurred expenses. If you’re trying to determine if a project is profitable, or if it has long-term positive cash flow, you need to deduct a share of the taxes. Here, we mostly mean the business-level income taxes, which will be paid later on. In other words, this is cash which will remain in your account for months after the final client payment.

Learn more about this financial management system.

The downside is that it will reduce cash flow when the project is complete. Cash flow takes a hit in the near term for companies that decide to underbill their clients. The best approach is to bill according to how much of the project has been completed. Many aspects related to cash flow management in construction are dependent on a project’s operations, but operation and financial components of a company are often segregated.

From optimizing billing practices to managing expenses and leveraging technology, these insights aim to bolster a project’s cash position. In construction, keeping cash flow in the black requires more effort than it does for many other industries, and there are several reasons for this. It requires that companies expend a lot of money on materials, many of which are purchased before work can even begin. Plus, there’s the overhead cost of maintaining bulldozers and other equipment, which must be done consistently even if they aren’t being used.

Friedman’s transformed their credit processes by eliminating heavy manual work with Handle

His aim is to bring awareness to a brighter future for the Built World where industrial workers and companies work smarter. This can be quite easily achieved today by using systems and softwares to create constraints around purchase requests and other important construction workflows. Financial audits are not something people look forward to facing — the process is intended to find mistakes and weak points — but regular audits can improve the overall health…