Mastering Cash Flow Analysis and Forecasting for Construction: A Step-By-Step Guide

Cashflow management is a critical yet challenging process for construction companies of any size, impacting project success and long-term financial health and stability. 

According to a study by Blackline, 44% of leadership surveyed stated that the lack of cash flow visibility makes them feel less confident in their business’s ability to stay competitive in the coming year.

Regardless of the size of your construction firm, your current processes, and even your level of technology, this guide will provide a detailed, step-by-step approach to mastering cash flow analysis and forecasting—ensuring your company is always crystal clear on its financial health and prepared for growth at every stage.

Why Do A Cash Flow Analysis and Forecast?

IBISWorld reports that as of 2023, there are over 3.9 million construction businesses in the US, a 3.4% increase since 2022. That is a remarkable volume of cash flow, which accounts for 4% of the GDP annually and creates more than 1 trillion dollars worth of economic movement (according to insight shared by Forbes).

Navigating the accounting aspect of a construction company can be a precarious juggling act, and getting paid on time is a stress shared by many company leaders. In a recent Blackline interview, 55% of CEOs admitted that they regularly worry about rising interest rates from their customers' late payments.

This reality emphasizes how important it is to make the most of your revenue as it heavily depends on understanding your current cash flow and reliably forecasting future cash flow. Ensuring your customer invoices are paid requires a clear picture of your financial health from month to month, and while you can do all you can to encourage clients to pay on time, you can’t have total control. 

Here are the main reasons why you need a cash flow analysis and forecasting process as a construction company:

• • You have a full picture of your business’s financial health.
  • You know exactly how your money comes in and exactly where it goes.
  • Improves your ability to plan future cash flow accurately.
  • Having a detailed and accurate picture of your profit and loss helps keep your bookkeeping clean–which is very helpful during tax time.

With these key benefits solidifying the value of conducting a cash flow analysis–ASAP– let’s jump right into the step-by-step guide that will help you master your cash flow strategy, and position your company into a proactive stasis that fuels growth.

3 Steps To Effective Cash Flow Analysis

Regardless of how long you’ve been in business, or your current processes, the following step-by-step guide breaks down cash flow analysis into three key stages you can apply at your pace. 

The first stage may be the most important because it ensures the integrity of your data, the efficacy of your analysis, and your ability to forecast accurately for the future.

According to a Blackline survey, 49% of executives polled struggle with numerous issues with data accuracy. By ensuring this first stage crosses every T and dots every I, your cash flow analysis and forecasting will have an exceptionally stable foundation.

Stage 1: Preparing for a cash flow analysis

As with most successful business endeavors, a solid plan is key. Before your cash flow analysis begins, there are a few preliminary steps you can take to help you create the most solid strategy, save you tons of time, and avoid unwelcome surprises.

1. 1. Make sure you have a clear picture of every source of income. Write everything down.
   2. List every business expense with detailed insight into factors like total balance, vendor/creditor, monthly payment, payment schedule, and a breakdown of interest versus principle (if possible).
   3. Collect insight into how you're currently handling cash flow processes to identify areas of optimization. Analyze what your AP, AR, or Payroll (frequently this person is one-and-the-same) specialist’s day-to-day looks like. 

Here are questions to ask:

• • How long does it take to generate, send, pay, and process an invoice?
  • How, when, and where are timesheets filled out and submitted?
  • How much time does the payroll specialist spend chasing down information, correcting errors, or getting approval?
  • How long does entering payroll actually take, and how much time (money) does your payroll specialist spend executing this task on average?
  • Is your AP process smooth and reliable? Are bills always paid on time? If not, why? Are there months when this happens more frequently than others?
  • How accurate and consistent is your record keeping? Are there gaps that could cause problems at tax time?

As you can see, it’s not just about where money comes from or goes out. Understanding (and optimizing) what happens in between is paramount. To illustrate, a 2024 IBM study revealed that “poor data quality” can cost US businesses $3.1 trillion annually million dollars each year. 

Stage 2: Executing your cash flow analysis 

So, now that you have more information on your current incoming, outgoing, and interim cash flow processes, it’s time to execute your cash flow analysis. 

💡 Pro Tip: Taking your time with step one will help turn this collection of numbers, questions, and lists into a concise, clear, and invaluable financial asset.

1. Create a cash flow statement composed of all the data you’ve collected during stage one. There are a variety of free templates online if you want to save time. Regardless of whether you use a template or start from scratch, just ensure the statement contains an Operative, Financing, and Investing section.

Here’s what they contain:

• Operative Activities outline core business operations after expenses are subtracted from the number.
• Financing Activities outline recently borrowed funds, loan repayments, and company stock buybacks or issuances.
• Investing Activities outline all of your assets like stocks, bonds, and long-term investments.

These components all work together to create a clear overview of incoming and outgoing fiscal operations.

2. Analyze your completed cash flow statement so you can identify positive and negative patterns. This is the best spot to start answering those questions about processes from stage one.

3. Once you’ve closely studied your cash flow statement, you can begin brainstorming and looking for ways to increase its flexibility. This could involve adding another line of credit, renegotiating loan terms, refinancing, or introducing automation to optimize efficiency.

Stage 3: How to create a cash flow forecast

While this is the final stage in developing a strong and effective cash flow process, it’s also just the beginning. This work is ongoing, and as you grow, you’ll find ways to improve and tweak along the way.

But now that you’ve got all the data laid out in a clear picture of your financial activity… you can use it to create a powerful cash flow forecast. Plus, there are a variety of templates you can download for free, so you don’t have to try and build something from scratch. Here’s one we created especially for this guide!

• • Define your cash flow goals. After closely studying your cash flow statement, work with stakeholders to brainstorm goals for the future. 

• • Use your statement and your defined financial goals to determine a specific time period that you want to forecast. This is almost like budgeting, as many like to adopt a month-to-month approach.

• • Look to cash flow data from the previous year for some guidance, taking special care to find common themes or trends. If you noticed one particular trend also aligned with a higher rate of income (revenue), see if you can apply similar strategies going forward. You can also try to look for the opposite, and if you see a certain trend driving revenue down, make a plan for how you can avoid it.

• • Try to estimate how much cash is going to flow in (besides direct sales)-- some examples being money gained from selling an asset, franchise fees, tax refunds/rebates, etc…

• • Estimate what expenses are going to flow out for the time period you’re forecasting. Be as detailed as possible, and the better your record-keeping processes are, the more accurate and reliable this stage will be.

• • Create a balance sheet filled with all the ingoing and outgoing financial data you’ve compiled above. Once the time period expires, analyze the estimated cash flow (your forecast) versus the actual cash flow (how your finances actually behaved.) If there are differences, note the level of discrepancy (good or bad), and use that information to help you in your next forecast. 
    
    

Construction Cash Flow Management Best Practices

With a solid plan in place, making the most out of your cash flow management and forecasting strategy is just over the horizon. To ensure you’re on the right track, here are four construction-specific cash flow management best practices, and why they’re key to success.

1. Pay bills on time–but don’t pay too early and lose cash flexibility

This first one may be surprising since it would seem that the earlier we pay a bill, the better. However, while paying off a debt gives an initial moment of satisfaction, it can actually cause more stress in the long run.
You may dip into negative cash flow if paying off that bill early means you have less money to work with the rest of the month. Of course, it’s important to pay on time, but it’s never a bad idea to have extra capital on hand.

2. Don’t pay cash for your supplies

For expenses like materials, equipment, and supplies, it’s better to finance them. Speak with your vendors and see what lines of credit and loans you can take advantage of. This is recommended because it saves on upfront costs that you can reallocate toward other business endeavors while also dealing with a manageable, consistent payment plan.

3.  Never settle–demand the best product at the best price

The more preliminary research you do before buying anything (equipment, software, materials, etc.) the better your cash flow management strategy performs. Your business and your team deserve the best, so schedule free demos of any product or software and always find the best price.

4. Don’t let payroll throw a wrench into your process 

One of the most complex and important elements of construction cash flow management is optimizing payroll. It cannot be overstated how important this step is–and here’s why:

• • 49% of American workers will leave a company after experiencing two issues with their paychecks. (ASAP Payroll Service, 2021)
  • On an annual basis, “buddy punching” costs US businesses hundreds of millions of dollars in payroll expenses. Investing in reliable accounting systems can help construction businesses encourage employee compliance.
  • Manual payroll entry accounts for 35% of payroll errors, according to reports by GNSA.

But there’s another best practice that construction companies need to adopt if they want to make the most out of the previous four practices, and that’s how you integrate technology into your accounting processes.

How Tech Changes the Game for Cash Flow Analysis in Construction

It can feel risky transitioning to more automated technology–especially if you’re already using an ERP that’s “working well enough.” If you’re hesitant to adopt new software for your construction company, you’re not alone. A recent report by Clutch reveals that 25% of small businesses still use old-fashioned pen and paper to track finances. 

However, tracking your company finances by hand can be highly problematic. Here’s what can happen when you handle bookkeeping and resource management the old-fashioned way:

• Every last mouse click costs you. According to a study by Ernst & Young, each manually entered HR task (like payroll entry) costs US businesses an average of almost $5 per entry.
• Those little mistakes add up to astronomical losses in revenue. GNSA reported that manual payroll entry accounts for 35% of payroll errors. Not to mention that lost revenue isn’t just about making mistakes. Manual time sheets can open up opportunities for fraudulent activity like “buddy punching” which can cost businesses in the US hundreds of millions of dollars each year. Investing in reliable accounting systems can help construction businesses encourage employee compliance.

But with the right technology, designed specifically to support and adapt to the unique nuances and compliance requirements rampant in the construction industry, the advantages are even more remarkable.

• Organizations using payroll software for timekeeping and payroll are 44% less likely to commit errors.
• Software automation can reduce payroll errors by 75%, according to a report by The Hackett Group.

There are many software brands claiming to be the “best of breed”, and the prices vary wildly. With such a high saturation of tech to choose from, you may be tempted to choose a brand with a pedigree. However, not just any ERP software has the tools, interface, and customer support team that construction companies need due to the many nuances of operating in the industry.

One of the most crucial aspects of cash flow management is choosing the right software. Here’s why:

• You never stress about staying compliant again. Investing in cash flow management software is one of the most effective practices to ensure compliance, accuracy, and efficiency. 
• You’ll have more cash to do more with. Save time and money that you can reallocate to higher-priority projects and business growth by eliminating manual cashflow management tasks (like payroll). 
• Your AP and AR teams have more space for higher-priority projects. Companies who use hh2 save close to 70% more processing time by automating collecting, coding, and chasing down paper time sheets.

But these concepts don’t just have to stay conceptual.

For real-world examples, check out how Miller Construction all but eliminated payroll errors and headaches with the hh2 platform. And when you’ve finished, you can also learn how NEI improved its quality and consistency with our cloud-based services.

Better Cash Flow Can Be Yours With hh2

The hh2 cloud services platform was built for construction experts by construction experts. Our founder (and our team) understand the unique needs and pressures on construction companies, and that’s why we created an intuitive, user-friendly, and highly effective platform that not only does what it promises but even integrates with current ERP software like:

• Sage
• Autodesk
• Procore

And so many more…

If you’re ready to learn more about how to stay on top of your financial health, schedule a demo to see how hh2's Document Flow helps you optimize your cash flow.