The following content is sponsored by Trimble. Every month, your construction business runs a profit and loss statement. If your numbers come out in the black, you’re golden, right? Your business is making money, and your future viability is ensured. Or is it?

Unfortunately, you might be missing part of the bigger picture. While basic income and expense reports are valuable, they don’t necessarily show you trends over time or seasonal adjustments. They might not factor in things like current inflation rates or added labor, equipment, and material costs. They might show huge spikes or declines due to one huge project or a stoppage in work.

That’s why it’s important to understand cash flow trends over time. Cash flow forecasting in construction management can help you make more informed decisions and better plan your company’s project workloads and workflows down the road to maximize profit opportunities. 

What Is Construction Cash Flow Forecasting?

Construction cash flow forecasting looks at all of the monies coming into and going out of your construction business over a set period of time. Annual forecasts are common among a lot of businesses, yet many construction companies — especially those involved with multiple or longer-term projects that could span several years — often strive to create multi-year forecasts.

Since most contractors get paid as portions of work on construction contracts are completed, having steady cash flow at all times is vital to keeping workers and employees, vendors, subcontractors, and others paid timely and accurately. 

The health of your company’s cash flow can also have a significant impact on your overall profit margin. By spotting trends or issues ahead of time, your company can proactively create cash reserves that can be dipped into when needed to help projects run more efficiently or prepare for potential business disruptions or downturns.

Why Does Cash Flow Forecasting Matter?

Returning to those operational expenses for labor, equipment, and materials, let’s say you need a new backhoe. You must decide whether to buy or rent. Renting gets you the latest model while freeing you from most costly repairs; however, a leased backhoe isn’t an asset you can sell in a pinch. Purchasing may cost you more initially, but it may make better business sense if you plan to use it again and again. You can also capitalize on leasing out the equipment once you have the title. 

In short, you need to look at the money in your business more like an accountant completing a corporate tax return — considering your assets and liabilities along with income and expenses. The funding you use to purchase the backhoe might fall under borrowed funds, but you must consider the loan repayment terms and asset depreciation.

You decide to get a commercial loan to purchase this equipment, and your lender requests financials. Fair enough — so your accountant provides them. Maybe your company earned significant money from projects in the past few months but has been operating at a loss while covering expenses over the past two years. Without solid forecasting figures detailing financial opportunities in the years ahead, this construction management pattern could raise eyebrows, resulting in outright denial or exorbitant interest rates, which can add to your expenses and decrease your profit potential.

Timely Data Is Key to Accurate Construction Cash Flow Forecasts

The lynchpin to effective construction cash flow forecasts is timely, accurate data. Historically though, construction companies have had to work with project and financial data that is weeks or months old to gain insight into how work has fared. This too can impact cash flow, as limited cash reserves or profit from one project might need to be dipped into to cover expenses for starting new projects.

Thankfully, modern technologies are helping. Many contractors are moving to the cloud and better-connected construction management solution suites, which provide real-time data as work is happening as well as powerful analytical and business intelligence tools to provide more accurate reporting and predictive modeling for how future projects might fare.

These solutions can help your company deliver construction cash flow forecasts that are more reliable as well as identify new areas for improvements, opportunities, and more. Real-time data and workflows ensure that vital information isn’t falling through the cracks and can help you determine which projects are worth your company’s time bidding on and which ones are not — further driving positive cash flow in the months and years ahead. 

Here are some things to consider when creating a construction cash flow forecast:

• Start with a reconciled cash balance: If you’re building a cash flow forecast for the first time, begin with a reconciled current cash balance for your company.
• List all your money in: Indicate all sources including contractual earnings, loans, or grants, startup capital, capital assets, and more.
• List all your money out: Include operational and seasonal expenses, labor, vendor payments, materials, equipment and estimated repairs, and other expenses.
• Use past projects to estimate future revenues and expenses: Though not as accurate as industries like manufacturing where costs vs. production tends to stay relatively fluid, historical data from previous projects can help determine ballpark figures for the revenue and cash flow expectations on future projects.
• Factor in seasonal or one-time expenses: Are expansion or capital asset purchases planned? Or does a particular time of the year tend to see less work? Work these into your projections.

Be conservative when creating projections involving income. While you’d like to think all of your invoices will be paid on time, that’s sadly not the reality. Update your forecast regularly, especially if your income ebbs and flows seasonally.

And look at modernizing your operations and workflows. Digitization and cloud-based real-time data and workflows can not only save significant operational and project efficiency costs — adding to your cash flow coffers — but these solutions can streamline your construction cash flow processes so that staying on top of forecasting is a breeze.