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Analyzing and Managing Cash Flow

Maintaining strong cash flow is critical – and often challenging – for construction companies and subcontractors. Cash flow became especially important when pandemic-induced labor shortages, supply chain disruptions, rising materials costs, operational restrictions, and project cancellations strained the industry from just about every angle.

And sadly, many construction companies don’t even realize their cash flow is misaligned because monthly financial reports aren’t always built to indicate when there is a problem. To understand cash flow, management must take deliberate steps to assess it.

How to Assess the Strength of Cash Flow

In general, cash flow can be defined as payments received less payments made over a set period, but to maintain healthy cash flows, we must look at key indicators, including some of the following:

Working Capital

When viewed as a percent of sales, working capital tells us if a company can cover its current needs in terms of funding, inventory, and supplies. Rule of thumb: a ratio exceeding 30 may indicate a need for increased working capital.


Liquidity ratios help us see if companies have cash (or cash equivalents) that could cover short-term debts.  Common ratios include: current ratio, quick ratio, and days of cash.

Accounts Payable

Accounts payable turnover tells us how quickly a company settles outstanding accounts.  Companies should pay attention if they see this ratio decreasing which indicates it is taking longer to pay off suppliers.

Accounts Receivable

Accounts receivable turnover helps us see how quickly a business collects on its debts.  Companies should pay attention if they see this ratio increasing which indicates customer collections are slowing down and might point to customer solvency or billing department issues.

Why Cash Flow is Important

The economic impact of the COVID-19 pandemic is likely to affect the construction industry for years, and companies with healthy cash flow practices will be best equipped to weather the storm. Even those whose cash reserves were boosted from federal and state assistance programs would be wise to address cash flow concerns now to set themselves up for success.

Having a healthy cash flow ensures a business can pay its bills, but it also improves the relationship a company has with its lenders. Lenders and bonding companies will analyze a borrower’s ability to maintain healthy cash flows to determine if they are strong candidates for a loan or bond. They will look at some of the following:

  • Financial statements and management reports
  • Outstanding loans
  • Borrowing and credit history
  • Financial projections
  • Billing and collection policies
  • Estimates of jobs currently being performed as well as a list of upcoming projects

Best Practices for Cash Flow Management

There are several ways construction companies – even those currently struggling to get by – can strengthen cash flows:

  • Transition manual processes to automated processes
  • Establish a standardized billing process
  • Proactively manage collections and charge interest when payments are late
  • Finalize change orders quickly
  • Negotiate payment terms with suppliers
  • Start building (or rebuilding) a treasury plan for emergencies
  • Refinance loans to take advantage of lower interest rates
  • Consider leasing equipment when existing equipment fails
  • Talk to your CPA about new deductions or tax credits
  • Be on the lookout for fiscal support opportunities from new or recent legislation
  • Be open to making changes to your supply chain
  • Entice and keep good-quality workers with sufficient benefits and competitive salaries

The LaPorte Construction Industry Group has more than five decades of experience providing accounting services to the industry. For more information on establishing practices to strengthen cash flow and enhance financial flexibility, contact Director Douglas Hidalgo.