Within the construction industry, there are several myths I would like to bust! One of them is to change the negative perception around taking out a loan or needing funding!  As businesses start out or begin to grow and scale, obtaining additional financing or securing small business construction loans to support cash flow to take on new projects and get mobilized with labor and materials should be seen as a strategic and smart move, as long as it is executed correctly!

Having a solid financial partner can strengthen your business and set you up for success far into the future.   Whether you have been in business for years or just starting out, focusing on the financial aspect of your business should be one of your highest priorities.  One of the first steps in securing a loan for your small construction business is setting up a relationship with a bank.  This is not just opening a bank account – which, yes, is part of it!  But the first part is opening a bank account at a bank where you can speak to a live human who understands your business, your industry, and your goals.  That is the foundation of being able to gain access to capital and a future lending program.

To obtain a strong lending or banking partnership, it will be imperative to get your financial documents in a clean and manageable order.  You can do this in a number of ways, but I highly recommend finding a good accountant and solid tools and resources to manage your cash flow. 

According to the SBA (Small Business Administration), only 13% of loan requests were approved at big banks in 2021.  That leaves the alternative and private lenders to fill the gap.  “No one should be everything to everyone.”  Banks and lenders all have their own specialties and consumers they can best support.  That is why in the construction world, we have to think “outside the box” and really focus on the relationships we cultivate with one another.   We need to find unique lenders to partner with us for financial support and ones that understand construction, our challenges, and what it takes to be successful in the industry.  By the way – this means the same for me at MF.  If the average bank doesn’t like the construction industry, they definitely don’t like a private lender to set out making small business construction loans to contractors in the industry.  My advice here comes from first-hand knowledge and personal experience.

What does it mean to be bankable?  A “bankable business” is one that has a strong focus on some of these key areas:

1. A solid financial track record highlighting your ability to be profitable 
2. Stable and predictable cash flow that is efficiently managed and supported through clean financial documents.  Your cash flow reports should allow the business leaders to predict, estimate, track, and execute a variety of financial decisions in order to continue to grow and protect your business.  Your financial documents include tax returns, income statements, and balance sheets. 
3. You should care about your credit reputation, as it demonstrates your integrity and discipline in repaying loans and paying bills on time, which ultimately lowers your financial risk and can reduce your cost of borrowing money. 
4. Lastly, you want a relationship oriented, dependable and knowledgeable leadership team who will make responsible decisions, display honesty and trust, and continuously build strong relationships to grow the integrity of the company with a variety of business partners. 

When opening a bank account, you will need the following, so be sure to keep these documents in a safe and easy-to-locate place:

• Articles of incorporation
• Proper forms of ID like driver’s license for any owner of 25% or more of the business (and spouses) 
• Operating agreement (shareholder, K1 schedule)
• Evidence the business is in good standing with the state in which they are formed (this can be done through your state entity search)
• Business Profile-  Which is an application highlighting what your business does, what it sells, where you are located, who you sell to etc. 

This may sound like a lot, but it is in fact easy to do as long as you spend the time to organize it and manage it!  Securing small business construction loans when needed for a construction business can be beneficial in multiple ways, as it provides the capital necessary for growth, stability, and operational efficiency.  

First and foremost, it can help with your cash flow management. Construction businesses often face fluctuations in cash flow due to project-based revenue cycles, seasonal slowdowns, or delays in client payments. A loan can cover operational costs—like payroll, materials, and equipment—during these periods, ensuring the business can meet its commitments without interruptions. This stability helps maintain credibility with clients, suppliers, and employees

It can also allow you to build your business and invest in equipment and technology to best serve your business and client’s needs.  Construction requires substantial investments in specialized equipment, vehicles, and technology, all of which may be necessary to stay competitive. Loans allow businesses to invest in updated machinery or adopt new technologies, such as drones or construction management software, without depleting cash reserves. These investments can improve efficiency and reduce long-term costs.

Lastly, securing small business construction loans can help you scale and expand. Securing a loan can empower a construction business to take on larger projects, enter new markets, or add to its workforce. Having access to capital can be pivotal when bidding on significant contracts or taking on projects that require upfront expenses, positioning the business for future growth and new revenue streams

Ultimately, a well-structured loan can enable a construction business to grow steadily, navigate industry-specific challenges, and stay competitive, all of which contribute to its long-term success.  The largest takeaway from this should be number one,  it is ok to take out a loan, and number two, ensure you keep good records and organization of your financial records! 

America was built upon the foundation of freedom seekers.  Our forefathers were able to create this country from their bare hands, paving out the roads to begin their journeys, building the homes to house their families and constructing the buildings that became their towns.  The America we look back on was beautiful, intricate, and strong.  As generations have gone on, our culture has evolved.  Technology has advanced our world, expensive material costs outweigh the quality of materials used, and most importantly, the reduction of skilled, motivated and passionate people in the workforce required for America to continue building has dramatically impacted our world!  With the next generation of youth reluctant to get their hands dirty, and nearly 40% of the current construction workforce predicted to retire in the next decade, we have a huge labor shortage crisis on our hands. Without construction workers, how will we solve traffic problems, build up new infrastructure to support growing populations, or repair homes after catastrophic storms damage cities?  Is the future of the construction industry destined for destruction or prosperity?   

No one has a crystal ball, but if we look at statistics, construction projects around town, or talk to young students exploring their future career, the answer may be scary, BUT with some changes there is an opportunity to change the tides and build America back up again!  

1.) We need to work together to help change the perception of what a career in construction is really like 

2.) We need to work with business partners to make building costs more affordable, but do so without jeopardizing quality craftsmanship and materials, and 

3.) We need to embrace technology in a way that helps us drive efficiency and sustainability for the future!

The construction industry, for many, is viewed as a “second” place option they must go when they failed on a “traditional” pathway, or that it is a “less than optimal” line of work, somehow less noble than that of a college-educated person in an entirely different field.  The truth is, they are wrong, and we need them to know that.   The construction industry is a place the smartest and most aspirational people should gravitate to.  This industry has more, or as much, to offer than any other industry. After all, where else can you enter a workforce with a clear path to making a 6-figure salary, transition to any aspect of business, or even in the same role but to a larger company, or start your own business to perform the work you have learned?  The stories told about the construction industry oftentimes paint an incomplete picture.  Telling the truth about this industry, that this career is a pathway to the modern “American Dream.” This American dream spirit will hopefully always imply a way for Americans to achieve success, through hard work, opportunity, but while “Marriage, owning a home, and having children are lower priorities than they were in the past. Being happy and fulfilled and having the freedom to make significant life decisions top the list of important elements of the American Dream of today’s young people.¹”  Attracting the new generations to this dream through construction will help bring itself back and at the same time attract the next generation into prosperity to ensure growth in the future of the construction industry. 

In order to maintain the building demands our culture has placed upon us, we are in dire need of retaining and recruiting the next generation of workers to continue rebuilding America.   We need to focus on educating, training, and attracting people to the construction world.  We need them to know how this career path can benefit them AND impact the world in which they live.   We need to talk to them about how much money they can make at every level or position.  We need them to know what it looks like to have a career path in construction – how they can transition it from laborer to manager to executive to owner.  We need to tell the truth and reverse the stigmas associated with failing construction businesses.  The only way they can see this is if we join together and share the stories and fruits of their labor.  We must talk to other people about the good work you do, bring young people out to the job sites, let them test drive the excavator, and see the world from the roofline of the skyscraper that has been erected. We need people outside of construction to do their part too! 

Next, we need to blend practices of the past, which gave the construction world a solid foundation to build upon, where pride went into everything that was touched.  Don’t you agree that buildings built 100 years ago have a different look and feel compared to what we see today?  When I pass by our courthouse downtown which was started in 1899, I am still touched by its beauty, radiating in formality, simplicity, order and tradition. 

It was the effort and labor of construction workers that foster all of this history that still stands today.  As we look at growing cities, new structures seem to be going up as fast as possible and many look like a standard box, some being complete eye sores.   Moving forward, we need to combine tradition with modernization in order to continue to prosper into the future.   It is no secret that the cost of materials and the speed at which structures need build is a major factor affecting this, but it can be overcome. 

We need consumers, developers, environmentalists, lenders, banks, elected government officials, and of course developers to be proactive and change the expectations.  We must stop just trying to mass produce buildings and place new infrastructure with the cheapest and lowest quality materials, not to mention the design and architecture of the structures and buildings.  It would be impossible if construction companies, developers, and architects refused to change their ways, but if they are willing to be strategic and use modern materials, it is possible with a technique called “retrofit architecture.”  Blending the old with the new, ultimately sustainably supporting our American legacy.  A fantastic example of this can be seen in NYC with Alpolic Metal Compositie Materials, which were used in a new NYC wearehouse project in the Chelsea neighborhood. 

“The Warehouse project has stayed true to the heritage of the building while infusing elegance and modernity. It is a marvel and a true study of mixed material use that has created a new icon in New York’s Chelsea art district. It stands as proof that bringing older buildings into the modern era doesn’t require a total tear-down. Retrofitting can often provide a fresh new life at significant cost savings.  The goal was to maintain the historic integrity of the original structure while creating an environment inspired by innovative technology and materials, designed to support a modern way of living and working.²”

As you look around different cities and towns across America, the historic buildings look vastly different than most of what is built today.  The buildings and infrastructure of the past have definitely weathered some storms, but they all seem to stand the test of time better than some of the eye sores often built today.   I know, I know, easier said than done, especially since higher quality typically comes at a significant cost, and reality proves not everyone can or will pay the premiums.  Which brings us to another potential challenge for this industry in the future, inflation.  This obviously will impact every other industry, and is not just unique to construction. 

As we discuss rising costs, controlling prices and decent interest rates, the economy plays a huge part in this, and it is hard to control.  Construction contractors are then impacted by the bidding process, which also has a direct correlation to business cash flows on projects and profit margins to keep them afloat.  With so many drivers affecting inflation within the construction world, the future will be dependent on elected officials both at the local, state, and federal levels that will help prevent inflation from rising.  There is no crystal ball or safeguard for this, so contractors should plan accordingly for the future.  

One thing to focus on for the future is to ensure you don’t place all your cards in one basket when it comes to suppliers.  Focus on building strong and trusted relationships with multiple suppliers, so you can expand your network and have options in challenging times.  The other thing to do is ensure you have strong records of your financials and cash flows.  In fact, according to SCORE, “82% of all small businesses fail due to cash flow problems. When money gets tight, paying yourself, your bills, the payroll and other financial obligations can be extremely difficult. This is why companies of all sizes keep a close eye on cash flow, or the net cash and cash equivalents currently flowing both in and out of your business. ³”   When money gets tight, paying yourself, your bills, the payroll and other financial obligations can be extremely difficult. This is why companies of all sizes keep a close eye on cash flow, or the net cash and cash equivalents currently flowing both in and out of your business. Mobilization Funding’s entire business is set up to help construction and manufacturing contractors stay cash flow positive.  There is a plethora of resources and a free online cash flow tool to keep track of all your individual projects cash flows.  In keeping strong records and understanding exactly what cash is moving in and out of your business, it will help you make informed decisions like which projects to take on, and which ones to say, “No” too. The future health of the construction industry will be dependent on these businesses staying afloat.   Additionally, with high interest rates and inflation rising it’s becoming both more challenging and more necessary to secure funding – not a great mix huh?   As a result of this contractors are taking on projects where their margins might not be as high or they don’t have the best cashflow structure, but they think winning a bid will help put more money in the bank.  This strategy is actually a recipe for disaster, as not taking into account the costs of completing those projects will leave them in the red, well into the project and trying to dig themselves out.  Strong records of financials and thoughtful selection of the projects they take on based on their cash flow situation will help make them bankable in the future.  Mobilization Funding is structured precisely so that our loan programs provide funds according to the contractor’s cash flow cycles.  Money is provided when gaps in cash flow appear and repaid back when the contractor is paid, and the cash flow is positive.  Contractors having a strong grasp and understanding the their financial structure and cash flow cycles of their projects will help sustain the industry and defy the odds of failure for the future to come! 

Finally, the construction world must be able to embrace and utilize technology to increase efficiency and find more sustainable ways of building that will also ensure protection of the environment for the next generation. One way that technology is helping to make construction more sustainable is through 3D printing and prefabrication.  “3D printing allows for components to be printed directly from digital models, eliminating the need for traditional manufacturing processes. This not only reduces the amount of energy and resources used in production but also increases accuracy, leading to fewer errors and less waste in excess materials. Technology will help play an important role in creating new materials to aid in construction materials.  Marsh says, “Expanded use of robots and machine-assisted applications can help revolutionize the construction sector.⁴”  Robotics don’t have to replace our skilled workforce, but they can help make them more precise and efficient.  For example…. What if all of the younger generation knew that Bulldozers, Excavators and other Heavy Equipment can all be operated with GPS and Robotics now to ensure that what they are trying to accomplish is done within a matter of inches and even millimeters.  That dirt in one very precise spot can be picked up and dropped in another very precise spot at certain and specific grade that was determined in the office.  Don’t you think those facts might be more appealing to the younger generation when they are considering a role in the construction industry?  Technology has opened countless opportunities for making construction more sustainable in the long term, by streamlining processes and utilizing fewer resources than ever before possible.  This will dramatically affect the way we continue to build when needed.

Whether you are in the construction business or not, everyone can make an impact!  It is time to do your part!  In doing so, America will have the talent and manpower it needs to embrace technology in construction, to seek out sustainable methods to help protect the environment, to value quality materials over cost or quantity, and help preserve the greatest country on Earth! It will give the next generation the opportunity to work hard to create something new, to reap rewards, and to achieve the American dream this country was founded upon.

References: 

1. (Wilson, 2023 https://www.closeup.org/for-young-americans-the-american-dream-resonates-differently/).  

2. ALPOLIC. “Can Classical and Modern Architecture Coexist?” https://www.alpolic-americas.com/blog/can-classical-and-modern-architecture-coexist/.12/6 /21. Aug 7, 2024.  

3. Sutter, Brian, SCORE, The #1 Reason Small Businesses Fail – And How to Avoid It, https://www.score.org/resource/blog-post/1-reason-small-businesses-fail-and-how-avoid-it.

4. Plan Radar. “ Technology is Paving the way for Sustainable Construction.”

https://www.planradar.com/ae-en/technology-is-moving-construction-towards-sustainablity/#:~:text=3D%20Printing%20and%20Prefabrication,less%20waste%20in%20excess%20materials. Jan 2023. August 7, 2024.  the construction industry as a whole. 

There’s one word that has been popping up for a while now. Inflation. Inflation is the rise of materials, labor, and equipment. Not only does it raise costs, but it also heavily impacts the bidding process and cash flow on your projects. What numbers worked then don’t work now, and being adaptable to inflation is critical for your business, especially construction inflation. 

Inflation is also impacting your team and their families. As a business owner, team leader, or even if you are just leading yourself, it is a mistake to underestimate the impact this can have on your team or individual performance.  

Key Drivers of Construction Inflation

• Material Costs: Volatility of prices for steel, lumber, concrete, and copper.
• Labor Costs: Skilled labor shortages and state minimums driving up wages.
• Regulatory Changes: Compliance with new regulations increasing expenses.
• Energy Prices: Higher fuel and energy costs affect operations. 

Think about the impact these things can have on someone’s ability to do their job?  For sure, it does not make their job easier, and it is likely making it harder.  This could lead to someone feeling less confident, insecure, or unhappy.  These are traits that could potentially lead to mistakes.

Why Inflation Matters for Bidding

Accurate bidding is essential for profitability, and construction inflation directly impacts the bidding process:

• Cost Estimation: fluctuating prices make accurate cost prediction challenging.
• Contract Clauses: Price escalation clauses can mitigate risks but deter clients.
• Competitive Edge: Effective inflation management offers a bidding advantage. 
• Profit Margins: Accurate inflation projects are critical to maintaining margins. 

What is my recommendation on how to combat Inflation?

This isn’t to scare you away or start prepping for the worst. My advice here is to educate yourself on these factors and how they are impacting your business, your business processes, systems and you team. Collectively create the plan, for when things do hit the fan, as we all know, proactive is better than reactive. 

• Market Analysis: Stay up to date on material and labor forecasts.
• Supplier Relationships: Understand and secure pricing and material availability.  Make sure you have a plan for backup suppliers, and create a wider network to lean on.
• Create a strong Contract: include price adjustment provisions to protect your margins, negotiate terms, and provide clear reasons for any adjustments you need.
• Advanced Procurement: Buy materials early at fixed prices or negotiate on higher quantities that could give price breaks. Do what you can to avoid rapid cost spikes.
• Efficient Team and Cash Flow Management: Complete projects on time, understand where the money is going each week. Take time to map out the possibilities and make adjustments that are efficient to the project and business.  
• Do not be afraid to say “NO” to a project:  This is not the time to try and thread a needle to take on additional risk. Go into every project eyes wide open.

Know your strategy. Understanding what the market is doing and establishing solid relationships could not be more important as we move through high material costs, labor shortages, and as continuous changes impact the construction industry as a whole. 

Been pondering the question “What is retainage in construction?” without an answer? Read on. 

What is retainage?

Retainage is a common word all subcontractors and construction-related businesses need to be aware of AND account for in their cash flow statements. The meaning comes from the words root, retain, or to hold. With contracted work, it is very common for the project owner or their bank to hold retainage back from the GC’s contract and, therefore, for the GC to withhold or not pay out a percentage of the contracted price until specific milestones are met, or the project is fully completed.  When you think about the uncertainty in construction work from labor challenges, material shortages, and weather delays, this makes perfect sense as to why a portion of funds, retainage, would be held until the end of the project. This “security deposit,” if you will, ensures the contractor completes the work in its entirety and does it to the satisfaction of the GC and the overall scope of work outlined for the finished project. Generally, retainage ranges from 5-10% of the project’s contracted price. Oftentimes, payments are paid to the subcontractors in progress payments, of which retainage can be held out from each payment, OR one lump sum is held until the end of project completion. The GC and the subcontractor will agree upon the exact percentage ahead of time, and that amount will be stated in the contract.  

This covers the basics of “what retainage is in construction.” However, it is important to mention that there are some legal considerations based on state regulations for retainage rules. In the state of New Mexico, withholding retainage is not allowed, whereas in Texas, there must be a 10% retainage on all private construction projects. In the state of Florida, with regard to any contract for construction services,” a public business can only withhold a maximum of 5% of the payments as retainage. When determining what retainage to establish, be sure to check out your state’s laws. If contracts violate the local and state laws, then the contracted amounts can risk becoming invalid. Paying close attention to how retainage is designated within your contracts is extremely important. There have been a lot of lawsuits and manipulation when it comes to contractors and developers underpaying for work being done.  

How can retainage in construction affect my cash flow?

Retainage is common practice and therefore, contractors are aware roughly 5-10% of their payments will not be received until a later time. However, when not properly accounted for in their financial statements, this can create working capital challenges. For example, a plumbing contractor may finish work on their building, but the project will not be completed for another 6 months (sometimes even years!!), leaving 10% of their full contract value payments not hitting their bank accounts for a significant amount of time.  Consider this: 10% of the contract may be as much as 50% or more of the actual profit from this job. Meanwhile, the plumbing contractor needs to move on to other projects and oftentimes, they are short on cash, waiting on the retainage from prior projects to come in. This is why understanding the query “what is retainage in construction” while utilizing a cash flow template that is well structured in timing the inflow and outflow of cash on a weekly basis is imperative. Retainage must be accounted for on each project within cash flow statements. Let’s review how to properly account for retainage in your financials.

Incorporating retainage into your cash flow statement

When you have the cash flow of every project estimated and scheduled, you have a solid foundation on which to build your business’s profitability. When inputting data into your cash flow tracker, look for a tool that will auto-calculate each of your pay apps net of retainage. Otherwise, deduct your retainage percentage from every expected pay app when you are accounting for how much cash will actually be coming into your bank account. Your cash flow tool should have a function for when you will actually be paid by your customer.  Contractors include the full amount they are invoicing each month, including the retainage amount, but it is then deducted when determining the amount to be paid in cash for that invoice. In other words, it is earned at the time you invoice but then held till it is due when you meet the milestones. You GET retainage when you submit a FINAL invoice for retainage at the end of the project AFTER the project has met the requirements to invoice retainage per the contract. The moral of the story,  proper recording is key! Your cash flow tool needs to have the functionality to show when that money is coming into the business. Or you can just use the one that we created and have on our website for you (https://mobilizationfunding.com/cashflow/). Our tool keeps track of the percentage of retainage you enter and when you expect the retainage to be paid. It is important to update the dates you actually receive the funds. If the retainage payments are delayed, other project cash flows may also need to be re-estimated, especially if you are relying on the funds to get started on other projects. 

Wondering when the best time to pay for your materials might be? When it comes to paying for materials, the optimal solution depends on the project modeling, needs of the project, and the cash flow requirements.  It also depends on how long it takes to secure the material and how readily available it is.  If there is a way to save money by paying the supplier early AND you have excess cash flow, then take advantage of that.  However, if you don’t have the extra cash, you should pay the supplier no later than when you are paid for the project (during which the materials were used).  This will ensure you do not get out of balance between your Accounts Payable and Accounts Receivables.  Ideally, you are using a Project Cash Flow model to determine the answers to these kinds of questions.

• What financial documents are typically needed to obtain a project/contract loan? 
• Is my personal credit score required?

In order to demonstrate your ability to pay, you will want to get your financial reports in order.  Here are the ones to focus on:

• 2 years of business tax returns
• 6 months of bank statements for all business accounts
• 2 years of internal financial reports (income statement and balance sheet)
• Current debt schedule 
• Current Accounts Receivable (AR) and Accounts Payable (AP) reports.  

Most lenders will ask you to complete a short application, and some will also pull your personal credit score.

Cash flow is not hard to manage once you are aware of what information you need to track.  First and foremost, you need to know what the costs are.  Make a list of everything needed for your project. This will include expenses such as materials, travel, labor, tools, etc. Managing cash flow for small business starts here.

Second, you need to model the project out to see how you will be spending the project-related costs according to the schedule you plan to maintain.  Stress test the model to see what happens if the schedule gets pushed faster or the project gets delayed.  What if the payments you are expecting in 30 days take more like 45 – does that blow up the project for you?  Do you have the right terms with your suppliers?  Should you use your contract labor or direct labor?  Is it more important for me to have the right payment terms with the vendors I choose, or should I be more concerned about the price I pay them?

A Project Cash Flow model is another key tool to managing cash flow for small business and will help answer all these questions for you. Make sure you know how much money you need to execute the project as planned and earn the profit you expect to make when you bid on the project.  For an easy-to-use cash flow tool and calculator to accomplish everything discussed in this article, check out our MF online Cash Flow Tool here.

When looking for immediate cash or a loan to help your business get the financing you need to start a project or build a product, there are a plethora of options available to you., but which one is right for you? Factoring vs. line of credit. What are the pros and cons of each? Where does a merchant cash loan fit into the equation? To start, they all vary in terms, costs, and payment structure.

When it comes to manufacturing businesses and companies that are making goods to be sold using accounts receivables or purchase order agreements for sales, Factoring is a hot term for a particular loan type.  Factoring involves selling accounts receivable (unpaid invoices) to a third party (factor) at a discount.  It’s more of a transactional arrangement than a loan. The factor purchases the invoices and assumes responsibility for collecting payments from customers.  Factoring is typically used by businesses with slow-paying customers or those experiencing cash flow issues.  The amount a business can receive from factoring is usually based on the value of its outstanding invoices and the creditworthiness of its customers who owe them the money.

Factoring vs. Line of Credit 

Another popular business loan is a Line of Credit (LOC). A line of credit is a revolving loan facility that provides access to a predetermined amount of funds, which a borrower can draw upon as needed.  Interest is only charged on the amount borrowed, and repayments restore the credit line for future use.  LOCs are versatile and can be used for various purposes, including managing cash flow, financing inventory, covering short-term cash flow deficits, or covering unexpected expenses.  Businesses often prefer them for their flexibility and ability to access funds quickly when needed.

Merchant Cash Advances (MCA)

Something we talk a lot about with clients and the entire network at Mobilization Funding is  Merchant Cash Advances (MCA).  These are loans you really need to be wary of.  I have written a number of articles on these, and recommend you read about his more in detail here as well.

A merchant cash advance is a lump sum advance provided to a business in exchange for a percentage of its future sales or revenues.  Unlike traditional loans, MCAs are repaid through a portion of the business’s daily credit card transactions or bank account deposits.  MCAs are typically used by businesses with consistent credit card sales, such as retail stores or restaurants, and may be easier to qualify for than traditional loans.  However, they can be expensive due to high fees and factor rates, making them less favorable for businesses, especially those with cash flow issues.

Cash flow comes in three forms: operating, investing, and financing. We’ll focus on operating cash flow, which is the money your business makes from selling goods or services. Basically, the money your company makes doing whatever it is your company does. Financial cash flow shows the money you use to fund your business, including debt, equity, and credit. Investing cash flow is money created from investment opportunities. Now let’s dive into the different types of cash flow and how to calculate operating cash flow!

Types of cash flow

There are three major sources of cash—operations (company revenue), investments, and finance (loans, lines of credit, equity raise). 

Operations cash flow is all cash generated by the purchase of your company’s main service or product. Most of a typical contractor’s cash flow will come from operations, from the work you perform. When you bill your customers or submit a pay app and then get paid, that’s a primary source of cash. Consider if you have other sources as you prepare your cash flow statement.

Investment cash flow includes cash generated by investments in capital assets or other ventures. An example of this may be the interest charged on a loan to an employee or an investment made in another business, or it may be Bitcoin that you bought in the business. 

Finance cash flow is the money you take in from debt or equity, less the payments you make on that debt or equity (known as “Debt Service”).

How to calculate operating cash flow 

Let’s say you own a luxury baby apparel boutique and you have a goal to increase revenue by 25% as compared to the prior year. To reach that goal, you’ll want to estimate the necessary additional expenses and cash needs in order to make that goal attainable and then track against those estimates all year. You will also need a budget, but that is for another chapter. Follow the steps below on how to calculate operating cash flow or utilize a Cash Flow Calculator to streamline the process:

Step 1: Determine your cash flow starting point. 

This is as simple as consulting your business cash flow report when you have one, but in the meantime, you will need to do a little work. Start with what is in your bank account(s) right now and add any additional sources of cash you have access to. Then add up all of the free cash flow from all other available Sources. This would likely be Operational cash flow. Next, you will need to choose a specific date to start from—oftentimes it makes sense to start with the end of the previous year because you should have a clean set of financials and/or a tax return that states specifically where you are at that period in time (December 31^st). Then you can use that specific year as your “baseline” to project forward from. 

Step 2: Estimate incoming cash flow for the next period. 

Based on historical cash flow tracking of Year A (the “baseline”), you can make a rough calculation of what the expected revenue will be for Year B. 

Be sure to account for any anomalies, positive or negative, in the historical data. For example, if your company was closed for several months due to the shutdowns related to the coronavirus pandemic, that will have a negative effect on your cash flow data that should not be repeated. 

Similarly, if you worked on a particularly large project—something way outside your normal scope—it is best to mark it as an outlier in terms of estimating cash flow. On the other hand, if you do have one-time events that you know are typical each year then you should account for those too. 

For example, you are going to purchase a truck this year or you know one of your customers is going to order in bulk at the beginning of the year versus consistently every month like in previous years. These are the kinds of things to think about when planning in this stage of the process.

Step 3: Estimate outgoing expenses for the next period. 

Just like you did with your revenue, you’ll want to review and tally up all of the expenses from the baseline period in order to get a rough idea of what you will spend in Year B. In a perfect world you will estimate revenue and expenses at least on a monthly basis to start and plan for the year—then refine this down to weekly looking ahead 13 weeks at a time. Then as each week goes on you add a week to the 13 so you always have a 13-week “look ahead” of the cash needs of the business. The week you finished becomes what actually happened and you adjust the weeks coming up and add one more week to the end. This allows you to always have a line of sight to the next 13 weeks of your business.

Step 4: Subtract the estimated expenses from the estimated revenue.

This one is pretty self-explanatory. Just like when you’re creating your cash flow statement, you need to subtract your expenses from revenue in order to arrive at your estimated free cash flow. This will give you the projected cash balance to end the period of time you are planning for. 

Step 5: Estimate your starting and closing cash flow for the period.

You can now see your estimated opening and closing cash flow statements for Year B. Let’s break it down in an example. 

You ended Year A with an available cash flow balance of $250,000. Your Year B estimated revenue is 1,000,000. The estimated expenses for Year B are $800,000. Your estimated available cash flow is $200,000, and your closing cash balance is $450,000 ($250,000 from Year A and the additional $200,000 from Year B). 

Now you have your starting point or opening balance and your estimate. 

Estimating cash flow is not an exact science, especially when you are planning out an entire year. When you are looking at it yearly, that is more of a budget in our minds than a cash flow tool, but you need your budget to know where you are going to start from. Remember that these are your best guesses based on the data at hand. Stay flexible and regularly check in on your cash flow estimates as part of your cash flow management practices. 

Consistently checking in on cash flow is something you want to do on a weekly basis, at a minimum, if not even daily. Again – we recommend you use a 13-week cash flow tool to manage the cash of the business. You can check out of free tool here. For more information and helpful tips, fill free to check out our Big Book of Cash Flow here and unlock your company’s potential for growth!

Congratulations on your new contract!  “What are the project funding requirements?” is one of many common questions that arise as businesses begin to expand and grow.  As businesses get multiple contracts at one time, analyzing and understanding your cashflow on each project becomes more important than ever before.  First, you need to take a look at your cashflow (on each project and how they roll up overall to the whole company) to ensure you can first perform on the project and maintain or exceed the standards you have established for your team.  Ask yourself these questions – do you have the labor force?  Access to the suppliers you need? And, is the original plan when you bid on the project still in line today?

Next, get your financial reports in order – the last couple of business tax returns, bank statements for all business accounts, internal financial reports (income statement and balance sheet), debt schedule, Accounts Receivable (AR), and Accounts Payable (AP) reports.  These are some of the main project funding requirements you’ll want to have available. Have these organized in one folder and spot you can easily access and send them to your lender when they ask for it.  Include any Cash Flow modeling you have for the project and the amount you think you need to get the project done, how you determined that amount of money, and what you will be using the money for (this is commonly referred to as the “Uses” portion of a “Sources and Uses” report / spreadsheet / table).

You can also contact your existing relationships – bank and banker, accountant, controller, and colleagues in the industry.  If you have not established relationships already for this exact purpose then you should contact the people you trust (friends, colleagues, and especially other business owners in your industry) and ask them who they use and their experience with them.  Look at these options first, research them online, and see what they say about themselves and what others say about them.  Do your research and homework on their website, YouTube Channel, and LinkedIn.  See who resonates with you and contact those people first to see if they can help you.