Building & Construction Businesses: Why Cashflow Keeps Breaking — And What to Do About It
Updated: Jun 8
'The Lag' - The scoreboard you are reading today was written four months ago.
In all businesses, cashflow is everything. That’s why Building, Maintenance and Construction business owners often fixate themselves on their accounting software’s cash in/cash out dashboard. And it’s no wonder – the invoices keep coming while the fortnightly payroll looms ever present. If your net position is not leaving ample net profit (what's left after cost of sales + business and staff overheads) every week - and God Forbid it's in the negative - you may have a 'Lag' issue.
With the reactive nature of the industry often distracting leaders’ attention from the patterns and trajectories metastasising across their business, they tend to notice cashflow problems when it’s already too late, lashing out in the wrong directions in the hope they miss the iceberg. But often the ship’s too big - ‘The Lag’ in cashing out invoices and claims just too long - to pull a rabbit out of the hat for next month.
Brutally put, leaders who want to improve cashflow next month are already too late. The levers that move next month’s numbers were first pulled 90-120 days ago. Why? Revenue invoiced this month - in most project-based building and construction businesses up to around $20m in size - is not a measure of what the team did this month. It is a measure of what the team did 3-4 months ago.
That’s how long the sales cycle can be. By the time a number appears on the report, the decisions that created the outcome have already been made. Praising or punishing the result changes nothing - it can only influence a new result in another 6–12 weeks. This is both music and terror to many a trade/construction business owner's ear.
WHERE DOES CASHFLOW ORIGINATE FROM?
Cashflow begins with a quote, not an invoice.
The chain goes as follows:
Prospect/Engage → Quote/Tender → Win/Lose → Schedule → Deliver → Handover → Claim → Invoice → Cash in Bank
Even for an established client, say you have a brief phone call, email or catch up for a meeting and the client says there’ll be an RFQ next month. Happy Days - only 3 or 4 competitors rather than the usual 15-20 for open tenders.
Next month comes around and you finally get the Invite. It then takes 3 weeks to estimate and to submit - and you're bloody sure you've got enough margin and fat in it to pad yourself for nasty surprises. You then wait another 3 weeks to get the result - that's if there's no variations. Luckily you win it. Then it’s another month before you commence on site, at least.
The project runs for 3 months and cheerfully entails 3 progress claims over the program which you vigilantly included in the approved schedule. To get the final one you need a perfect handover. And you've likely got 20 of these scenarios in any month. Minimum.
The Perfect Cadence is as follows:
1. Always Be Quoting/Tendering - Keep the pipeline full. No quotes means no pipeline, means no wins, no wins means no forecast, no forecast means no future revenue. Keep on top of your Win/Loss Ratio. Keep on top of your Average Margin - not just for business profit but Project Padding to protect from nasty surprises.
2. Win - Convert quotes into purchase orders and signed contracts. Quoting without winning can become a drain on overheads and morale alike. If you're not winning you need to work out why - fast. Is it your presentation? Accuracy? 'Unforced Errors'? Is every other company really just 'buying work' or have you not put forwarded the best submission? Are you doing Tender Reviews for everything you lose?
3. Claim and Invoice - Raise claims at every milestone and invoice without delay. Every week late is cash deferred. Follow your unpaid invoices up politely, but firmly. You've done the work now make sure you get paid.
4. Deliver On Time, On Budget, On Spec - Delays push milestones out. Time lost on site is revenue pushed into the next period. Defects create debts. Perfect execution onsite means you limit the chance of cash delays, you get paid quicker and you maximise the potential for repeat business. Your brand and reputation will flourish.
5. Protect Margin - Estimating blunders, delays, errors and subbie shenanigans erode margin. Enough of them turn a profitable job into a loss. Desperate quoting/tendering also can 'whiteant' your profit margins - ask any reputable industry player about what under-pricing does if you make it a habit.
6. Ensure Right Team Capacity - Be realistic and measured in your expectations. If you overload your PMs, CAs or Estimators, mistakes will inevitably occur. Sure, there can be times when you can push your team to the brink. But the brink can never become the normality, or cracks will appear in performance, morale, accuracy and even the health of your employees. Don't work a horse to death. Feed it well, rest it well. Or it wont reach the finish line.
THE LAG IN PRACTICE:
In a cashflow sense, aside from getting the project delivery fundamentals right , October’s poor result was most likely a July problem. April’s strong result is December’s achievement. The problem is neither month in isolation tells actually you much about what the team is doing right now.
WHAT LEADERS SHOULD BE ASKING:
How many quotes/tenders were submitted last month and what is the total pipeline value?
What are your average submitted gross profit margins like? Are they in line with your strategic plan's revenue and business net profit goals?
How many quotes/tenders were won and lost last month, and what are the win/loss ratios like?
Are progress claims being raised at every eligible milestone across all active projects?
Are any projects running behind due to scheduling, trades or defects? Assess all that would/could/will defer claims.
Are you tracking profit erosion on your active jobs (submitted margin compared to your likely net position)?
Are you following up claims and invoices, politely yet firmly, which are past due?
There you have it. The P&L keeps the business alive, yes, but its not its life-force.
Wellsteed Group works with Commercial Building and Construction Companies, as well as trade and maintenance firms, to maximise their revenue, net profit, brand and client base. We do this through getting strategy, structure, operations, performance, brand, sales, marketing, culture, recruitment and team function right. That's the life-force of the business. Please reach out if we can be of assistance.
Speak to us today for a tailored, comprehensive strategy, including processes, systems, workbooks, workflows and overhead discipline for how to ensure your cashflow defeats ‘The Lag’.
IN ADDITION:
If interested, we're happy to send you a complimentary 'Do I Need Help' Questionnaire Checklist, charting the key areas of building/construction related business health we consider critical to get your business 'Fit for Growth'.
Expressions of interest are open for access to our market-leading Construction Business 'Engine Room' Workbook. Built over hundreds of hours, this tool allows full and accurate visibility for forecast cashflow projections over multiple Financial Years. This workbook is ideal for business running up $25m PA, but could be adjusted for higher. The Workbook helps with anticipating the timing before the business, or department, starts recording actual net profit against its various overheads and commitments. It also helps you measure profit erosion across projects. We can Tailor this directly to your business type.
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