How to Accelerate Cash in the Bank
Step-by-Step Guide to Improving Cash Flow in Your Projects.
👋 Hey, Kyle here! Welcome to The Influential Project Manager, a weekly newsletter covering the essentials of successful project leadership.
Today’s Overview:
Harsh truth: Running out of cash is the only unforgivable sin in business. When you are out of cash, you are out of business.
The heart of financial intelligence is understanding the economic model of project management and how changes impact the overall financial health of the business.
Is your Work-in-Process (“WIP”) using cash or generating it?
The tools and ideas in this newsletter will help with your role in the business side of project execution and payment collection processes.
How to Accelerate Cash in the Bank
Filed under: Project Management
Contractors do three things: get work, do work, and keep score.
Which of these topics do you think gets the least recognition and training?
That’s right, keeping score – also known as accounting.
Accounting is so important that it’s 1 the 7 archetypes of The Influential Project Manager: The Accountant.
Today, you’re going to become better at keeping score for your projects and company. We’ll cover how to:
Use a liquidity indicator
Generate positive cash flow
Accelerate cash in the bank
Learning accounting might sound dry, but it's crucial for contractors and project managers. Good financial management makes you stronger in this competitive field.
The Importance of Cash in the Bank
The only financial sin in business that is not forgivable is running out of cash. If you are out of cash, you are out of business.
Surprisingly, more construction companies fail during economic booms than during recessions. Why? Because growth eats up cash.
For contractors, expansion means spending more money upfront on estimates, proposals, planning, staffing, and site expenses—long before any bills are sent to customers.
Sending a bill doesn’t instantly bring in cash. Contractors are still responsible for all costs until the customer pays.
That period of investing cash before getting paid is where contractors, especially in a growth mode, get into financial trouble.
Here’s how to stay on top of your cash flow:
📊 The Liquidity Indicator
Contractors with strong liquidity have the competitive advantage.
Liquidity is your ability to have enough cash to cover short-term liabilities like loans, payroll, and expenses.
A liquidity indicator is an easy financial calculation that uses the income statement and balance sheet accounts to measure if work-in-process (“WIP”) from operations is providing cash or using cash. It involves six accounts:
➕ Current Asset Accounts:
Accounts Receivables
Accounts Receivables Retention
Cost and Earnings in Excess of Billings (Underbillings)
➖ Current Liability Accounts:
Accounts Payable
Accounts Payable Retention
Billings and Earnings in Excess of Costs (Overbillings)
You calculate liquidity by comparing these accounts. Accounts receivables are money that will be converted to cash in the future, and underbillings are direct costs that have been incurred but not yet billed for. Accounts payables are money the company will have to pay out, and billings in excess of earnings are services the company owes to its customers.
Your goal is to run your project as liquid as possible.
The 3 Views of Liquidity:
Collections vs. Payments: Net cash pending collection vs. net cash waiting to be paid.
Positive Number: You are funding your own work-in-process.
Negative Number: The project owner is funding the work-in-process.
Average Days Outstanding: Average days outstanding is the most common way of calculating and displaying the liquidity indicator. This calculation tells you the number of days the cash is held in each account.
Formula: Account balance / (Project’s annual revenue / 365 days)
Financial Modeling: The ability to predict impact of changes before they happen.
For example, reducing collection time from 38.9 days to 30 days can free up additional [$X] amount of cash to invest or capture discounts.
Additional Cash Generation = Average Days of Accounts Receivable Improvement x Average Daily Revenue
All three views help frame how cash is being used on projects and its impact on the business.
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❌ The Impact of Change Orders
Change orders can be a major challenge to liquidity. They arise from multiple factors and must be billed promptly.
Did you know that unless you bill for the changes, your company will end up paying for all costs and losing any potential profit associated with the change order.
Best-in-class managers are prepared to handle change orders, and so are their clients.
Your job as a project manager is to sell the additional value resulting from the change order. If the customer is convinced of the value, then they should be willing to pay for the additional work in a timely manner.
Tip: Don’t let change orders roll over. Get them approved and billed right away to avoid weak bargaining positions at project end. Have a method for handling them in place at the start of the project, and make sure the client is aware of and on board with this process.
💵 The Right Behaviors for Positive Cash Flow
Managing the risk of getting paid is like any other good habit; it is all a matter of creating deliberate practices and having the discipline to apply them.
Here are some simple habits that can be put in place to ensure timely invoicing and collections:
Set calendar reminders: You don’t have to wait until the 25th to engage in the billing process. Start the process on the 20th, and list the key steps to complete on time.
Send standard forms regularly: Make it easy on your team by sending an email every month with all the forms they need to get the billings turned in accurately. The more you can do to simplify and automate your team’s tasks, the greater chance of them complying.
Follow up with reminders: After the forms have been sent, check in on progress. A quick call or email helps everyone stay on track.
Schedule review time: Set aside time before the 25th to review draft invoices with your team. Early revisions help catch mistakes.
Preliminary client conversations: During job meetings, discuss key billing items and any unusual charges. Remind them you are going to submit the invoice by the 25th.
Submit and follow up: Once you send the invoice, confirm receipt with your contact. Make sure it’s moving towards approval. It’s also worth double checking that their accounting system is set up to distribute within the days specified in the contract.
Ask for Payment: If the check is not in your hands by 35 days from the time the invoice is sent, check on it. Be professional and courteous as usual. There is nothing wrong in expecting to be paid as outlined in the contract.
💰 How To Accelerate Cash in the Bank
I'm going to explain how to accelerate cash in the bank for your construction projects.
Why is this important? Because when an invoice slips to 60 or 90 days outstanding, the lack of cash can quickly erode your project's profitability. Learning to manage this will keep your projects liquid and your business thriving.
Unfortunately, many people struggle with this because they don’t implement best practices from the start.
But don’t worry, I'm here to explain how you can overcome these problems.
Step 1: Customer Due Diligence
Knowing your client’s financial health can prevent poor investments and confirm project funding is secure.
Before starting any project, I encourage you to look into the client’s creditworthiness and confirm project funding. This step can save you from financial headaches down the line.
Step 2: Negotiate Up Front
Contractors often accept payment terms that are too lenient.
Instead of accepting terms, negotiate aggressive payment terms upfront. Make sure your contract includes a schedule of values that aligns with approved milestones. This keeps billings ahead of project costs, so you’re always overbilled rather than under-billed.
Step 3: Set High Goals
Setting high goals helps you strive for excellence and ensures better cash flow management.
Aim to be the best in class for collections. Track your performance against top quartile benchmarks for your construction type. This continuous improvement will keep your projects financially healthy.
Step 4: Train Your Team
A well-trained team can significantly impact your cash flow.
Train project managers and field leaders on best practices. Share with them that satisfied customers pay faster and teach them techniques to consistently provide value throughout the project. This reduces any reasons for payment delays.
Step 5: Bill and Collect
Delayed, inaccurate, or incomplete invoices are the most common cash flow problems.
Make sure your invoices are timely, accurate, and consistent with contract terms. Use pre-approved forms to meet client accounting needs. Know your customer’s payment practices in advance and adhere to them strictly.
Step 6: Go Ugly Early
Addressing issues immediately prevents them from becoming bigger problems.
If a problem arises, deal with it early. Assertive collection efforts from the beginning show your client that you’re serious about payments.
Step 7: Do Great Work
The bottom line is quality work leads to prompt payments.
A company who performs excellent work, provide great service, and maintain discipline in billing and collecting, is usually paid on time.
If a client is delaying payment for no obvious reason, ask them why, preferrably face-to-face.
Step 8: Price Promptly
Quick approval of change orders keeps cash flow steady.
Price all your change orders promptly and push for quick approval. Communicate costs and associated values clearly to clients. This will prevent unpleasant surprises and allow for timely payments.
Step 9: Over-Communicate with Customers
Keeping clients informed prevents misunderstandings.
Communicate often and early about project options and benefits. Keep customers updated on schedule impacts and involve them in decisions. Over-communication ensures everyone is on the same page.
Step 10: Learn How to Negotiate
Effective negotiation retains customers and results in mutual gain.
Train your teams in what negotiating is and how to do it in a way that retains customers. Teach them to identify options that result in win-win outcomes. This skill is crucial for handling change orders, schedule adjustments, cost negotiations, and more.
Step 11: Retain a Construction Attorney
This is your last resort. Legal battles are slow, expensive, and can damage reputations.
Avoid the legal route whenever possible. If legal action becomes necessary, having a construction attorney can help navigate the complexities. But remember, prevention is always better than cure.
Final Takeaways
A successful project is delivered on time, on budget, with quality and safety, and it generates positive cash flow.
Tools like the liquidity indicator provide understanding and application of sound cash management for project managers.
The three key concepts for successful project management are:
Building the project correctly
Managing the cost to earn a profit
Ensuring the cash flow is positive
When your project has a positive cash flow, it gets noticed. When all projects are cash flow positive, the company’s cash flow is best-in-class.
The tools and ideas in this newsletter will help with your role in the business side of project execution and payment collection processes.
Until next week,
Kyle Nitchen
🧰 Kyle’s Toolbox
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