Why Cash Flow Matters for Builders

Cash flow is the lifeblood of any custom homebuilding business. Managing large-scale projects with high material and labor costs requires careful monitoring to ensure that you always have enough funds to cover expenses. A well-maintained cash flow forecast helps you plan for upcoming costs, handle delayed payments, and make sure your business remains profitable, even during slower months.

1. Monthly Invoicing Based on Costs Incurred

For many custom homebuilders, cash flow is managed by invoicing clients on a monthly basis for the costs incurred during that period. This allows for more consistent cash inflows while matching the actual project expenses.

Key Steps:

• Track Monthly Costs: Ensure you record all materials, labor, and subcontractor costs each month.
• Invoice at the End of Each Month: Bill your clients for the costs incurred, making sure to cover any overheads or markups.
• Monitor Payment Cycles: Keep track of when clients pay, as delays can affect your ability to cover next month’s expenses.

Tip: Align your invoicing schedule with your supplier payment terms to ensure you have the necessary cash to cover materials and labor for the next month.

2. Creating a Monthly Cash Flow Forecast

To maintain a healthy cash flow, you’ll need to forecast monthly inflows and outflows for the duration of the project. This involves projecting what your expenses will be each month and ensuring that your invoicing covers those costs.

Steps for Monthly Cash Flow Forecasting:

1. List Fixed Monthly Expenses: Include operational expenses such as office rent, insurance, utilities, and administrative salaries.
2. Project Monthly Variable Expenses: These are your direct project costs, like materials, labor, and subcontractor fees. For builders, these vary from month to month depending on the stage of the project.
3. Include Overheads: Don’t forget overhead costs such as project management time, permits, and other indirect expenses.
4. Add Expected Invoices (Cash Inflows): Forecast how much you will invoice each month based on incurred costs. Make sure to factor in any delays in payment.
5. Calculate Cash Surplus or Deficit: Subtract your total monthly costs from your expected invoices to see if you’re projecting a surplus (positive cash flow) or deficit (negative cash flow).

Tip: Always build a buffer into your forecast to cover delayed client payments or unexpected project costs.

3. Tracking Costs and Invoicing: Key Categories to Include

Custom homebuilders need to forecast and track costs under several categories to ensure they invoice accurately. Here are the main categories to focus on:

• Materials: Include all costs for building materials like lumber, concrete, and finishes.
• Labor: Account for both subcontractor fees and in-house labor.
• Subcontractors: Ensure all subcontractor invoices are accounted for in your monthly cash flow forecast.
• Overheads: Include both direct and indirect costs, such as project management fees, equipment rental, and utilities.

Tip: It’s critical to regularly review your costs and ensure all incurred costs are included in your monthly invoices to clients.

4. Managing Delayed Payments

One of the most significant challenges builders face is delayed payments from clients. This can result in a cash shortfall if you don’t plan properly. Here’s how to manage this risk:

Steps to Mitigate Delayed Payments:

1. Include a Payment Buffer: Build a buffer into your cash flow forecast to account for late payments. A buffer of 30-60 days is recommended, depending on the client’s payment history.
2. Set Clear Payment Terms: Make sure your contracts specify clear payment deadlines (e.g., net 30 days) and late fees for overdue payments.
3. Consider Financing Options: If payments are consistently delayed, explore options like construction lines of credit or invoice factoring to bridge the gap.

Tip: Monitor client payment patterns over time to identify who may require extra attention or adjustments to their terms.

5. Visualizing Your Cash Flow Forecast

Using visual tools, like cash flow curves or monthly bar charts, can help you get a clearer picture of how your cash flow will evolve over the course of a project.

Tools You Can Use:

• Excel/Google Sheets: Set up a cash flow forecast that tracks monthly costs, invoices, and payments.
• PM Software Integration: If you’re using a project management system, many tools (like Ressio) allow you to track costs and generate forecasts automatically.

Tip: Always keep your forecasts up to date by adjusting for actual expenses and payments as they come in.

6. Best Practices for Healthy Cash Flow Management

• Review Forecasts Monthly: Make sure you review and update your cash flow forecasts each month, based on the actual costs and payments.
• Monitor Overhead Costs: Keep an eye on overheads to ensure they don’t exceed your planned budget.
• Communicate with Clients: Regular communication with clients about payments can help ensure invoices are paid on time.

Managing cash flow is essential to running a successful custom homebuilding business. By forecasting costs and matching them to monthly invoices, you can keep your finances healthy and avoid cash shortages that could stall projects. With regular updates to your forecast and proactive communication with clients, you’ll be well-positioned to handle both expected and unexpected expenses throughout the project lifecycle.