5 Cash Flow Challenges in Construction & How to Fix Them
Cash Flow Construction Companies
Introduction
Cash flow is one of the biggest challenges for small construction businesses. Many contractors find themselves struggling to cover material costs, pay their workers, and keep operations running smoothly while waiting on client payments. If you’ve ever found yourself in this situation, you’re not alone.
In this blog, we’ll explore five common cash flow challenges construction businesses face and practical solutions to overcome them. Through a conversation between two contractors, John and Lisa, you’ll get real-world insights into managing late payments, covering upfront costs, surviving seasonal slowdowns, improving job costing, and getting paid on time. Let’s dive in!
A Conversation Between Two Contractors
Delayed Payments from Clients
John (Remodeling Contractor): Man, cash flow has been killing me lately. I finished a big kitchen remodel two months ago, and I’m still waiting to get paid. Meanwhile, my bills don’t stop coming.
Lisa (Roofing Contractor): I hear you. Waiting on clients to pay is the worst. I had a roofing job last year where the homeowner dragged out payment for three months—I was stuck covering materials and payroll out of pocket.
John: Yeah, I can’t afford to do that anymore. What do you do to avoid this mess?
Lisa: A few things. First, I don’t start a project without a deposit—usually 30% upfront—and then I bill in progress payments at key project milestones. That way, I’m never floating all the costs.
John: That’s smart. I’ve been waiting until the job is done to get paid. No wonder I’m struggling.
Lisa: You should also consider offering early payment discounts—maybe knock off 5% if they pay within 10 days. Clients like saving money, and you get your cash faster.
John: That makes sense. What about the clients who just won’t pay on time?
Lisa: That’s where invoice factoring comes in. If I ever have a really late invoice, I sell it to a factoring company, and they give me 80% upfront while they chase down the rest. It’s not ideal, but it keeps my cash flow moving.
Covering Upfront Costs Without Going Broke
John: Okay, that helps with slow payments, but what about materials? I had to put almost $20,000 on my personal credit card just to get started on a recent project.
Lisa: Ouch. You’re not using supplier credit?
John: No. Didn’t know that was an option.
Lisa: Oh, absolutely! Most suppliers offer Net-30 or Net-60 terms, so you can get materials now and pay later. I negotiated Net-45 terms with my supplier, which means I have a month and a half before I even have to think about paying them.
John: That would change everything. What if I don’t qualify for that yet?
Lisa: Then open a business line of credit. I got a $25,000 credit line through my bank, and I only use it when I have to cover upfront costs. That way, I’m not dipping into my personal savings.
John: Alright, I need to start doing that.
Surviving the Slow Season
John: What do you do when business slows down? December through February is brutal for me.
Lisa: Oh yeah, winter’s tough. I plan for it. In my busy months, I set aside 15% of my profits into a separate account. That way, when work slows down, I’m not panicking about payroll.
John: I should’ve done that last year. I barely made it through.
Lisa: You can also offer seasonal services to keep cash flowing. I do gutter cleaning and small home repairs in the winter—it’s not my main thing, but it helps.
John: Maybe I could start promoting off-season discounts—book a project in January and get a deal.
Lisa: Exactly! That keeps work coming in when things are slow.
Fixing Bad Bidding & Costing Mistakes
John: You ever completely misprice a job and end up losing money?
Lisa: Oh, definitely. I underbid a big roofing project last year and lost $5,000. That’s when I started using job costing software.
John: What does that do?
Lisa: It helps me track materials, labor, and overhead in real-time. Now, when I price a job, I know my numbers are right.
John: I just kind of guess based on past jobs.
Lisa: That’s risky. You should also build in a 10% contingency on every job. That way, if something unexpected comes up, you’re covered.
John: That would’ve saved me a ton of stress.
Getting Paid On Time—Every Time
John: One last thing—how do you deal with late payments? I feel like I spend more time chasing invoices than actually working.
Lisa: I’ve been there. First, I changed my contract terms to Net-15 instead of Net-30. That way, I’m getting paid faster.
John: That works?
Lisa: Yes, and I also automate my invoices with FreshBooks. The system sends reminders at 7, 14, and 21 days overdue—so I don’t have to nag people manually.
John: I like that.
Lisa: Oh, and I accept credit cards and ACH transfers now. Makes it super easy for clients to pay right away.
John: That’s a game-changer. I’m definitely making some changes.
Final Thoughts
Lisa: Look, cash flow problems will never completely disappear, but if you require deposits, negotiate supplier credit, plan for slow months, price jobs right, and get paid faster, you’ll be in a much better position.
John: I appreciate all of this. Time to rethink how I run my business.
If you’re ready to take control of your construction business finances, we can help! Book a consultation today or sign up for our newsletter to receive expert financial tips tailored for contractors. Click here to schedule an appointment or subscribe for more insights!