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Discover Cash Flow 101 for Construction Businesses

Updated: Mar 26

A business that consistently runs at a loss and has negative cash flow is likely to fail in the long run. Therefore, the solution is to establish a positive monthly cash flow, which will allow employees to be paid and precise payments to be made.

Business owners, particularly in the construction industry, sometimes run out of cash since expenses are often paid before the invoices are issued. Thus, if contractors want to grow their businesses, they need to make sure they have a good cash flow. This should be their number one priority.

cash flow 101 for construction bookkeeping

TABLE OF CONTENTS

What is cash flow?

Cash flow refers to the quantity of money that comes into and out of a business. This is a crucial indicator for determining if a firm is profitable. A positive cash flow shows that more money is entering than going out during the business operation. When there is a negative cash flow, this indicates that more money is being spent than is being brought in. A cash flow statement records money inflows and outflows to help construction businesses analyze their financial health.

Not every business will make money right away, that's true. In fact, it takes three to four years for most small businesses to start making money. But as your business grows, a positive cash flow can help you get investors. This is certainly relevant if your company is pursuing larger projects, system upgrades to better reach more potential clients, and other similar goals.

What is a cash flow statement?

The cash flow statement is a financial statement that explains a company's cash sources and spending. It shows how much cash a company has on hand and how that amount changes over time. A typical cash flow statement will show monthly cash flow over a 12-month period.

The cash flow statement shows how much cash the company has in three core components: operations, investments, and financing. By looking at this statement, investors may see how well the business is making money.

Construction owners can also forecast future cash needs using this statement. Along with the balance sheet and income statement, the cash flow statement is one of the most essential financial statements issued by a company.

Why is cash flow important?

In the construction industry, businesses need a steady flow of money. Consistent cash flow can either keep the business running or fund new projects. On the other hand, construction companies may quickly run out of cash owing to factors beyond their control. For example, late-paying clients, an oversupply of unsold items, or an unexpected rise in raw material prices.

Managing cash flow allows a company to predict business needs, identify potential problems, and grow. Accordingly, it is important for those in the construction industry to regularly monitor cash flow.

What are the 3 categories of cash flows?

cash flow categories construction bookkeeping

Cash flow from operations (CFO)

Operating cash flows are generated by a construction company's regular activities. Such as money received from sales, payments for utilities, and wages. It shows the business's ability to earn money from its core construction services.

If the figure is positive, the business is making money. If the figure is not positive, the construction owner needs to review their projects.

Cash flow from investing (CFI)

Investment cash flows illustrate how much money is spent or made through investments during specific accounting periods. These can involve investing in marketable securities like stocks and bonds. Inflows are generated by interest and dividends paid on these holdings.

Cash flow from financing (CFF)

Your cash flow from financing activities is determined by the cash flow among your company's owners, investors, and creditors.

This section includes the long-term liabilities, equity, and dividends of your company.

Don't worry if this seems scary to you. You can always call Irvine Bookkeeping Team to check on the cash flow of your business. We can reach out to you with the most experienced experts who can help you understand the financial health of your business.

How to calculate cash flow?

To calculate cash flow, just subtract costs (outflows) from income (inflows) for a certain time. Because cash flow is divided into three activities: operating, investment, and financing.

The following is how cash flow is calculated:

Cash flow = cash from operating operations +/- cash from investing activities+/- cash from financing activities,

including:

Operating cash flow = Net Income + Non-Cash Expenses + Working Capital Changes.


Investing cash flow = Capital + Marketable securities + Division.


Financing cash flow: Dividend payments + Repurchase of equity and debt


How about free cash flow?

Free cash flow is the amount of cash remaining after operating expenses and projected capital expenditures have been deducted. Free cash flow is not considered the same as operating, investing, or financing cash flow. It is more of a performance indicator and shows how well your firm is doing.

The bottom line

Construction businesses need to keep having money coming in. They need to pay for new projects, pay for materials, labor, and operating costs, and grow. Yet, in an industry where profit margins are often tight, it only takes one slow-paying client to turn a company's cash flow from positive to negative.

Understanding cash flow, effectively calculating cash flow, and managing cash flow may ensure the longevity of a construction company. You can also consider hiring a professional bookkeeping specialist from IB. Let Irvine Bookkeeping do what we're best at, and you can take your business to the next level.


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