Industry Insights

How to Create a Cash Flow Management Plan for Your Contracting Business

Kristen Frisa
August 31, 2023
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Healthy cash flow is critical to the success of any construction project. While payments to the contracting team may be intermittent and are often delayed, there need to be enough liquid assets available to cover ongoing project costs.

A quick look at bank statements doesn't tell the whole cash flow story. Even if a contractor's bank balances look healthy, financial disaster could be just a few bills away. Understanding the financial health of a contracting business takes a little more work, including an assessment of its cash flow over time.

Cash flow refers to the money flowing into and out of a business. A healthy cash flow balances income and expenses, so there's always enough in the bank to cover costs.

In order to ensure continued healthy cash flow throughout a project, contractors need to create and maintain cash flow management practices. In this blog post, we will provide a comprehensive overview of a cash flow management plan, including its cash flow strategies for effective implementation. By the end, you will have a clear understanding of why such a plan is necessary and how to ensure its success.

What is a cash flow management plan?

A cash flow plan is a crucial financial document for any construction project. It goes hand-in-hand with the project budget to determine how and when you'll spend on expenses.

A cash flow plan details all the known income and expenses throughout a construction project and lays them out over time. It is similar to a cash flow forecast or cash flow projections, except that it's a living document that gets updated as the work progresses.

A cash flow plan gives you the gift of foresight. For each construction project stage, you'll know which personnel, equipment, and materials you'll need to pay for and how that payment schedule jives with payment dates.

For example, your project schedule will reveal the need to pay for assessments, consultants, and equipment rental deposits early on in the project. By laying it out on a calendar, you can see what deposit amount you'll need to charge to fund construction activities until the next progress payment is due.

Why you need a cash flow management plan

A cash flow management plan lets you map out the funds needed to keep a construction project moving from start to finish. This financial tool is to money what a schedule is to time. It tracks all the necessary pieces to avoid cash flow issues.

A cash flow management plan is different from a budget. A budget lays out expenses for an entire project. But it doesn't detail when the bills for those items will come. Without a payment schedule, you risk running out of funds early on, leaving you high and dry for the rest of that phase until the next scheduled payment arrives. Cash flow issues can halt construction projects or leave contractors deep in debt as they try to finance the work themselves.

By creating a detailed cash flow management document, you'll have a better sense of when to pay bills and when expenses are getting out of hand, and you'll be better equipped to handle any surprises as they come along.

Elements of a cash flow management plan

Your cash flow management plan will be unique to your needs and the individual construction projects at hand. Still, there are some standard pieces that you should include when setting up your cash flow analysis.

Consider operational income and expenses

The primary goal is to keep the bills paid and construction projects progressing. Operational expenses include payroll, materials procurement, equipment rental fees, permit costs, consultancy fees, and all other elements necessary to complete your construction project.

Don't forget business asset purchase or sale

Plan to buy new equipment or sell off a parcel of land? Sales or purchases can impact the amount of cash you have available to run your construction business. Note it on your cash flow management plan.

Credit as a cash flow strategy

Some construction companies strategically use financing to fund project activity. Don't forget to add in cash available to you via a line of credit or credit card and subtract fees and interest payments you'll incur.

How to create a cash flow management plan

A cash flow management plan is like a register of the amount of money available for use at any given time. It's far more comprehensive than just looking at a bank balance because it takes into account all of the elements listed in the previous section – payments that are due to come in or go out and expenses that you know will crop up – and puts them on a timeline.

If you're over 40, you've probably learned how to balance a checkbook. The check register you remember is a lot like your cash flow management plan.

1. Cash balance: Calculate your starting balance, including cash and cash equivalents

2. Accounts receivable and accounts payable forecasting: Following your construction project timelines, make a sequential list of all money coming in and going out as a result of your operational activities, asset sales and purchases, and credit maintenance.

3. Negative cash flow: If ever your "balance" looks likely to dip below zero, you've indicated a time when there could be a negative cash flow. Figure out where to make a change to allow for enough money to operate.

Your cash flow projection may look a little like this:

Before a project begins, the payment schedule will be estimated. However, looking at past numbers will help you make an educated guess at when expenses will come along and what they'll cost. As actual numbers come in, you can update your cash flow projection.

This chart will allow you to visualize when the cash balance in your account will dip and strategize how to keep a positive cash flow and all the bills paid.

Maintaining good cash flow practices

Now that you've got a picture of what your cash flow will look like over the course of each phase of a construction project, there are some actions you can take to protect the system you’ve set up.

Have a materials procurement strategy

Purchase strategically to take advantage of bulk pricing or price drops, while avoiding overbuying and related storage issues.

Have a cash flow backup plan

Expect the unexpected. Have a plan for selling off assets or dipping into credit to keep a project running in case of cash shortages.

Practice good invoicing

Invoice on time, with all the necessary details to expedite payment.

Make payment easier

Remove barriers to make payments to your construction company quick and easy. Truss makes it super easy to get paid with a payment link you can include on your invoices or embed on your contracting business's website. Your customers just click on the link and log in to their banking system to make a payment or pay via credit card.

With all the moving parts happening in a typical construction project, it can be tricky to keep tabs on project cash flow. With a cash flow document, contracting businesses can plan ahead to protect cash flow so that construction projects can carry on, even if unexpected expenses crop up.

Truss can help maintain healthy cash flow by keeping cash coming into contracting businesses, quickly, simply, and securely. Book a free demo to learn how.

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