The first of this four-part series concerning cash flow management for construction contractors lays the foundation for this article and those to follow.
Cash Flow Management Correlation
No matter what part your construction business plays in building construction, you understand that there are three essential structural components. These components consist of:
Columns: Vertical structural elements that transfer loads from beams and slabs to the foundation.
Beams: Horizontal structural elements that transfer loads from slabs to columns or walls.
Slabs: Flat, horizontal structural elements that form floors and roofs.
Further, you understand that each part plays a distinct role. Each of the three components contributes significantly to the overall function, and removing any one part would prevent the system from working correctly. The building cannot be completed when one part is left out because the parts are interdependent. They rely on each other to function effectively.
Cash Flow Management Essential Components
In much the same way, managing cash flow depends on three essential components. These components consist of:
Accounts Receivable: The money a business is owed by customers for products or services that have been delivered but not yet paid for. It’s a current asset on a company’s balance sheet.
Accounts Payable: The money a company owes to suppliers or vendors for goods or services purchased on credit. It’s recorded on a company’s balance sheet as a current liability.
Purposeful Dollar Allocation: Knowing precisely what cash is reserved, spent, or saved. (We call it the Envelope-Style Cash Reserve.)
Like the three essential structural components of a building, they each contribute significantly to the overall function, and removing any one part will prevent the system from working correctly.
Cash Flow Management is Key to Unlocking Growth
Cash flow is the lifeblood of every construction trade business. Without a clear handle on it, growth becomes an uphill battle. But here’s the truth: if you don’t actively manage your Accounts Receivable (AR) and Accounts Payable (AP), you can’t manage your cash flow effectively.
Think about it—AR tells you who owes you money, and AP tells you who you owe. If either is out of control, your cash flow becomes unpredictable. That unpredictability can leave you scrambling to pay bills, missing out on opportunities, or worse – struggling to make payroll.
The most successful construction businesses understand that managing AR and AP isn’t just a bookkeeping task. It’s a critical strategy for financial stability and growth. When you streamline these processes and gain visibility into your cash flow, you can plan ahead, seize opportunities, and confidently grow your business.
When you can truly see where your money is going—and where it should be—you gain the power to grow on your terms.
Cash Flow Management with an Envelope-Style Cash Reserve
Building a cash reserve doesn’t have to be overwhelming. With an envelope-style cash management system, you can take small, strategic steps to protect your business.
Here are three simple tips to start and fund a cash reserve using the envelope-style system.
1. Start Small and Be Consistent
Set aside a small percentage of every payment you receive. Even 1-3% adds up over time. Consistency is more important than starting big.
2. Label Your Envelopes Clearly
Designate specific “envelopes” for things like emergencies, equipment upgrades, or slow seasons. Knowing precisely what your reserves are to be used for makes prioritizing and sticking to the plan easier.
3. Use Windfalls Wisely
Got a larger-than-expected payment or a one-time savings on a project? Funnel a portion of it into your reserve to give it an extra boost.
Building a reserve takes time, but you’ll gain financial stability and peace of mind with a clear system.
Essential Cash Flow Management in Construction
Just as no one would consider undertaking a construction project in which one of the essential components was left out, no one should consider dealing with cash flow management without using all three essential components. Because . . . well, you know – cash flow is the lifeblood of every construction trade business.
Ambitious Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:
Clients and customers
Employees and subcontractors
Vendors and service providers
Governmental entities
Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:
Remain informed
Avoid hassles
Reduce risks
Be future-ready
Ready for action? Or want to know more? Get in touch today to schedule a complimentary discovery call. 866-629-7735
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