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Cash flow is the money coming in and going out of your construction business over a specific period of time – and managing it well is necessary for your long-term success. A healthy cash inflow and outflow shows you have the ability to collect from customers and enough cash to cover your expenses, which is especially important in the construction industry. Often, you have to bid on the next big project before you even get paid for your last project, which makes managing a construction company’s cash flow vital.

The ultimate goal of managing your cash flow is to generate positive cash flow over the long term. It is necessary to be able to pay your suppliers and give a salary to employees. If you have negative cash flow, there are methods you can use to better manage it.

In this article, we cover the importance of cash flow in construction loans, how to calculate cash flow, and techniques to better manage your cash flow.

The importance of construction cash flow in construction loans

Having a healthy cash flow is essential for any business. But in the construction industry, it’s especially vital, especially when you’re going to apply for construction loans or other small business loans. Construction companies often have to pay for a project’s materials and labor long before they expect to send out invoices, so they can turn to loans.

Commercial construction loans are difficult to obtain because you are receiving financing for something that does not yet exist. The lender will need to look closely at your company’s financial records to ensure that you are profitable and will be able to deliver on the job. Thus, cash management allows you to avoid late payments and prove to banks that your financial situation is stable enough for them to lend you.

To get a construction loan, you will likely also need to provide:

  • Personal and business credit (read this for more on how to establish business credit)
  • Proven construction experience as a general contractor
  • A big down payment, up to 30%
  • Project evaluation

The repayment schedule for a construction loan usually starts once you have completed the project. In the meantime, you usually only pay interest on what you have borrowed.

Construction Cash Flow Example

Here is an example of cash flow on a construction project that might help you better understand the importance of cash flow management.


Bid Price: $90,000

Monthly payment: $30,000

Project duration: three months

Cash flow example Month 1 Month 2 Month 3
Cash out $30,000 $30,000 $30,000
Materials and supplies $40,000 $5,000 $0
Air $5,000 $5,000 $5,000
Total collection $50,000 $10,000 $5,000
Positive or negative cash flow ($20,000) $0 $25,000

Labor costs more the first month because of the materials and supplies needed. There is a negative cash flow in the first month because of this. In the second month, your expenses slow down, but since you were in the negative, you do not have a positive cash flow. Over the past month, you begin to see positive cash flow as your expenses have been paid.

Construction Cash Flow Calculation

It’s important for contractors and subcontractors to determine your business’s cash flow so you know how you’re doing financially. You can calculate cash flow by following these steps:

1. Create separate categories

Separate your cash inflows and outflows from three categories:

  • Operational activities
  • Investing activities
  • Fundraising activities

You will calculate each of these categories individually. Then it’s math.

2. Find your operating cash flow

Cash flow from operations is your customer payments minus operating expenses, such as rent, labor, and materials. This calculation only includes cash items, such as services rendered and products sold.

Use this equation to calculate operating cash flow:

Operating cash flow = total cash from sales – cash paid for operating expenses

3. Find your investing cash flow

Investing cash flow is money flowing in and out for longer-term capital investments like stocks, bonds, real estate, equipment, or the acquisition of another business.

To calculate investment cash flow, simply add up all the items mentioned above.

4. Find your funding cash

Financing cash flow is any financing you get from lenders, landlords, or investors. So if you take out a loan, that would be calculated into your financing cash flow.

To calculate financing cash flow, add up all of your business financing items.

5. Generate a cash flow statement

Add the solutions to the three calculations above to your business’ starting cash flow for the period to add to your cash flow statement. We give more details about the cash flow statement in the next section.

What is a construction cash flow document?

A cash flow statement or construction cash flow document can help you understand the cash flow position of your construction business at the end of the period. To project cash flow, you can create a cash flow projection (or cash flow forecast) that predicts any potential future cash flow issues. This projection should give you time to pivot and avoid profitability issues in the months and years ahead.

Keep in mind that negative cash flow over a short period is not necessarily an indicator of trouble. Instead, it could mean you’re making big investments that will grow your business. You’ll want to focus more on long-term rather than short-term cash flow because sustained negative cash flow can be problematic.

Typical Construction Cash Flow Problems

When it comes to cash flow management in the construction industry, you may encounter several common issues:

  • You pay your bills too quickly. It might seem like a good idea to pay a bill right away so you don’t get overdue, but it can leave you strapped for cash in the meantime.
  • You don’t ask customers to pay anything upfront. You may need to pay for items before a new project begins. Therefore, not having payment written into your client’s construction contract can make it difficult.
  • You delay sending invoices. You are not sending your invoices to your customers as soon as the work is completed, which creates a delay in the start of the payment process.
  • Your customers are late to pay. On the other hand, you can send your invoices right away, but your customers take 90 days to pay you. Late payments can mean months without money in hand for another project. Non-payment is also a problem.
  • You have not budgeted for the retainer. Holdback occurs when a client withholds 5% to 10% of total construction costs until the project is complete, so not budgeting for this can create a hole in your cash flow.
  • You’re not managing change orders properly. Any adjustments to work after the project begins require a change order, and your project manager must manage changes to your budget to ensure you get paid for everything.

How to Improve Construction Cash Flow

In construction management, it can be difficult to keep track of all your finances and cash flow. If you’re looking to get out of the negative, there are a few things you can do. Allocating your costs, controlling your outgoing invoices, and setting up electronic customer payments can all help.

Also try progressive billing. This system allows you to bill for work as it is completed, which helps you avoid over- or under-billing (or billing the majority of the project at the start or end). Indicate in the payment terms that you will send invoices as you progress. Plus, business credit cards can improve cash flow — and some even offer a 0% APR for a while so you don’t pay interest for the first few months.

Instead of paying a bill immediately, delaying payment closer to the due date can reduce your cash flow gaps. And asking customers to pay money up front can help reduce the pressure of having to pay for all expenses out of pocket.

Finally, if you have slow-paying clients, try to be pickier about who you work with. Perform credit checks on current or potential customers to see if they have a history of late payment. This research can save you headaches down the road.

Lenders rely on construction cash flow documents

Having the right documentation in place before applying for business start-up loans is essential. Construction cash flow documents are no different. But if a construction loan isn’t right for your business right now, there are plenty of other options available to you.
For example, you might consider a line of credit or a short-term loan. These are more flexible options that generally allow you to spend on all your business needs. Create a free account (or update an existing account) with Nav to find the best possible financing options for your construction business today.

This article was originally written on June 29, 2022.

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