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.
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:
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.
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.
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.
Here are questions to ask:
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.
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:
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.
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!
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.
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.
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.
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:
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.
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:
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.
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:
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.
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:
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.