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Bruce Orr is a founder and data scientist of Pronovos, a financial forecast tool provider for contractors. Opinions are typical of the author.
“Cash Is Rei” can be the most commonly used phrase in construction finances and one of the most misleading.
Bruce orr
Courtesy of pronovos
The reason why in the world of raw construction finance, where you are always only a job away from success or failure, you can have a lot on the bank and be on the shore.
In other words, it is not the amount of cash you have; It is the control of the movement of cash through your projects, partners and pipes.
Why? Because without visibility on how the money moves, when it arrives, it goes out and where it is sticking, you are not directing your business. React to it.
That is why I think it is time for contractors to change the box to cash to cash.
A strong pipeline won’t save you
The money in a construction project is moving in three stages: cost, billing and cash received. The cycle determines if it is struggling or stopped.
I once worked with a contractor with more than $ 100 million in receding. On paper, they seemed unstoppable. However, they had poor billing discipline and charge more than 70 days. They did not break, but they slowly bleed. The time mismatches of their cost cycle almost crushed them.
You may be surprised to hear that this is not a rare story. According to the Construction Financial Management Association 2024 Benchmarker SurveyConstruction companies had an average of 23.5 days of hand cash, slightly lowering from the highest pandemic. Although this may look like a pillow, it is thin when Billings stays or to charge.
Inactive cash is not a safety network
Seeing a large bank balance can create a false sense of security. But the cash found is a losing value due to inflation, lost discounts and opportunity costs.
Instead, high -performance contractors understand the concept of assets’ profitability, a metric that reflects the good that you use your resources. According to Benchmarker’s survey, the ROA average for construction companies amounted to 11.8% by 2023, but better class companies reached 28.4%.
This type of gap does not occur by accident. It is produced by design: through strategic reinvestment and smart financial management.
Metrics that matter
Want to know if you are positioned for growth or just on the coast? Track these three indicators:
- Cash-Insers Ratio-reveals the amount of cash you have with respect to income. A low CTR is risky. High means you have some great opportunities ahead (if managed well).
- Cash: Indicates the time you can operate without new income. The average of the industry is just over 23 days. High is better.
- Return of assets: This measures how effective your capital use. The average industry is almost 12%. If you are under that, there is room to improve.
Visibility is equal to trust
You can’t handle what you can’t see. It is difficult to keep up with the complexity of modern construction with spreadsheets alone, but at least you should keep track of:
- What will be our cash position in 30, 60 and 90 days?
- Which jobs are positive or negative?
- What is your pending sales trend, that is, what speed your customers pay and improvement?
- Which exhibition do you have in a few great receipts?
If the answer to one of these is “not safe”, you have a problem. And the tools exist today to solve it, if you are ready to commit.
Effective leaders keep track of cash flow
This is not the job of accounting. It’s yours.
The cash flow promotes your ability to take on a new job, pay your team, invest in weather technologies and falls. I have seen companies that show margins of solid benefit, but they could not pay attention, not because they did not make money, but because they did not manage the movement of their cash.
Discipline surpasses drama each time. To reduce drama:
- Invoice early and often.
- Track DSO and push it down.
- Behavioral -based forecast, not hope.
- To get money, take advantage of the advance payment discounts – these are free margins.
The bottom line
Cash can be comforting. But the cash flow is king.
In an industry where the time is everything, the winners are not the ones who have the most money from the bank, they are the ones who move it faster, smarter and deliberately.
So stop asking )How much cash do we have?, Start asking )What speed are we moving it and where is it stuck?,
Because when you lead your cash flow, put your business in a position to lead the competition.
