Avoid Cash Flow Crises in Construction – Real Lessons and Solutions

Oct 1

Picture this: your team is halfway through a major project – foundations laid, walls starting to rise – and then suddenly, you’re out of cash. No money to pay your crew. No materials for the next phase. Everything grinds to a halt. But that’s not all.

The payments you were counting on from your client? They’re late. Now you can’t pay your subcontractors and the clock is ticking. Clients are calling, deadlines are slipping and your reputation is on the line.

This kind of nightmare happens more often than you think in construction and it all comes down to one thing: Cash Flow

Five Reasons Why Cash Flow Management is Crucial for Construction Businesses

Here are five reasons that are simple to understand and are impactful:

1) Keeps Projects Moving Without Delays

When your cash flow is steady, your projects don’t hit unexpected stops. Paying workers on time and buying materials when needed ensures that everything stays on track, preventing costly delays.

2) Helps Navigate Unforeseen Expenses

In construction, surprises happen – whether it’s weather delays, equipment breakdowns or price hikes. Managing cash flow properly means you’re prepared to cover these costs without missing a beat.

3) Improves Relationships with Vendors and Subcontractors

Paying vendors and subcontractors on time keeps your partnerships strong. A good cash flow plan ensures you’re never stuck trying to explain why their payments are late, so they’ll always prioritize your business.

4) Prevents the Need for Expensive Loans

When you manage cash well, you can avoid turning to loans with higher interest rates to cover shortfalls. This keeps more money in your pocket and reduces the risk of getting trapped in a cycle of debt.

5) Allows for Growth Opportunities

Healthy cash flow gives you the freedom to grow your business. Whether it’s taking on bigger projects, buying new equipment or hiring more staff, you’ll be ready when the right opportunities come along.

Case Study: A Lesson in Cash Flow

A few years ago, I started working with a mid-sized specialty contractor that was well known for it’s quality work in residential construction. They had several projects in progress and plenty lined up, but they were constantly struggling to stay afloat.

The Problem

They had taken on a few large residential projects, all at various stages of completion, however, payments from clients were delayed. Meanwhile, the bills kept piling up.

The Struggles

The owner was always concerned and stressed out about cash. His workers had to be paid every week, no matter what. On top of that, suppliers were constantly calling about overdue invoices and some even stopped delivering materials. To make things worse, the company’s line of credit was almost maxed out every month so this was always a constant headache.

The Solution

We needed to get control of the situation. I started by doing a deep dive into all expenses which was mostly labour and material and looked at when money was going out compared to when it was coming in. I also set up a work in progress (WIP) analysis to figure out which projects were causing the most problems. From there, we worked out a plan to prioritize payments that would keep the projects moving. Finally, we put it all into a simple 13-week cash flow forecast to see ahead of time what was needed to be paid and when.

The Outcome

With the WIP analysis, cash flow forecast and ongoing reviews, things slowly started to improve. Over time, the company relied less and less on its line of credit, and while it didn’t happen overnight, the owner is thrilled to see the business heading in the right direction.

Five Lessons Learned and Key Takeaways

1) Don’t Wait for Cash Flow Problems to Pile Up

Cash flow problems only get worse if you ignore them. Instead of waiting until bills stack up or payments are late, start paying attention now. A simple weekly check of what’s coming in and going out can help you spot trouble before it gets out of hand.

2) Focus on Payments That Keep Your Projects Going

When money is tight, it’s tempting to pay whatever is screaming for attention. But if you focus on what’s urgent instead of what’s important, your projects might stall. Make sure your workers get paid and that materials keep arriving. Without those, nothing moves forward, and delays will only cost you more.

3) Understand Your Costs So You Can Control Them

If you don’t know exactly where your money is going, it’s tough to manage cash flow. Take time to break down the biggest costs like labour and materials for each project. Once you know what’s eating up your cash, it’s easier to plan ahead and avoid nasty surprises.

4) Use a Cash Flow Forecast to Stay Ahead of the Game

A cash flow forecast is like a cheat sheet for managing your money. It shows when payments will come in and when bills are due. This helps you avoid running out of money at the worst time. By looking ahead, you can plan for slow periods and big expenses, instead of scrambling to find cash at the last minute.

5) Review Your Cash Flow Regularly

Setting up a cash flow plan is great, but it’s not a one-time thing. You need to check in often, whether that’s weekly or bi-weekly, to see how things are going. Sometimes, projects change or unexpected costs pop up, so regularly reviews help you stay on track and make quick adjustments when needed.

Final Thoughts

Managing cash flow might not always be easy, but it’s one of the most important things you can do to keep your construction business running smoothly. By staying on top of your expenses, planning ahead, and making regular adjustments, you can avoid common pitfalls and set your business up for long-term success. The sooner you start managing your cash flow, the better off you’ll be.

Let me know down in the comments if there are specific topics that you’d like me to cover next.

See you soon!

Hey there. I’m Jeff.

I started an online, modern accounting firm called JTL CPA. My goal is to help Architects, Engineers and Contractors in Ontario streamline their finances, enhance clarity and grow their business.

With more than a decade of experience working with various General Contractors and Specialty Trades, firms in the AEC industry want to work with me because I:

Help simplify their financial management to save time and reduce stress
Help gain clear, real-time insights into their financial status to make informed decisions
Help them leverage expert advice and support to drive the growth of their business

Follow me on LinkedIn or find out more at my website.

Need personalized help? Contact us today!