Cash Flow Forecasting 101 for Subcontractors

Getting the best out of your subcontracting business requires a multifaceted approach. It’s not just about delivering top-notch craftsmanship; it’s equally about optimizing your back-office workflows to ensure optimal cash flow. The key? Knowing how to implement and analyze cash forecasts. 

Regular cash forecasting empowers subcontractor billing teams with the knowledge required to build more profitable and sustainable businesses. So, if you’re curious about the benefits of cash forecasts, key components of the forecasting process, or strategies to take your forecasting to the next level, you’re in the right place. Off we go!

What is cash forecasting?

Cash forecasting is the process of estimating the amount of cash that will flow in and out of your business over a specific period of time—a.k.a. your cash inflows and outflows.

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Combined, this data is essential for creating clear cash flow statements and billing projections, providing a snapshot of your company’s liquidity and financial performance both in the near term and over time.

Difference Between Cash Forecasts and Billing Projections

One important note is that forecasting cash flow is not the same as running billing projections. Each serves different purposes in financial planning. Here’s a quick breakdown:

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In summary, cash forecasts are crucial to day-to-day financial decision-making, helping identify near-term cash surpluses and shortfalls. They are generally more reliable because they’re based on work already billed for. 

Billing projections, on the other hand, are valuable for strategic planning and resource allocation, visualizing periods of higher or lower project billing. However, they’re less precise due to their reliance on project progress estimates and potential workload variations.

Together, these tools balance immediate financial needs with long-term strategic goals, setting your organization up for success.

Why is cash flow forecasting important for subcontractors?

Unlike general contractors (GCs), subcontractors face longer payment cycles, often waiting up to 90 days for reimbursement. This extended payment cycle leaves their cash particularly vulnerable. A single late payment, unexpected cost overrun, or sudden dip in the market can significantly strain working capital, making it difficult to cover overhead, meet payroll, and take on new projects.

Cash flow forecasting acts as an early financial warning system, providing insight into your future financial positions by predicting when money will both enter and exit your accounts. 

With a tool like Siteline, for example, after submitting your billing, you can generate a weekly forecast of the amount of cash that will be coming into your organization. This foresight is essential for navigating the unpredictable nature of construction payments, safeguarding the company’s financial health, and helping ensure long-term viability. 

Benefits of Cash Flow Forecasting for Subs

While regular cash forecasts provide a host of benefits—largely stemming from the increased financial certainty they offer—the main advantages boil down to:

1. Enhanced financial decision-making: Knowing when you’ll have extra cash or when you might be running low makes it easier to balance day-to-day needs with plans for the future. For instance, if projections indicate a cash surplus, it could be a good time to take on new projects, hire more workers, or invest in new tools. Conversely, if cash is about to get tight, then it may be best to avoid risky projects or taking on big expenses. 

2. Improved operational efficiency: In addition to being able to plan your financial moves better, forecasting helps reduce your reliance on external financing while improving relationships with suppliers through on-time payments. It also keeps your pre-construction and project teams on the same page, ensuring alignment between estimates and actual cash flow. 

3. Increased business stability: Regular forecasting is crucial for surfacing red flags and making necessary adjustments to maintain a healthy financial buffer. In turn, this helps your business weather tough times or seasonal variations, as well as seize growth opportunities—critical advantages in a business known for its volatility.

4. Boosted stakeholder confidence: Knowing your cash position empowers you to meet short- and long-term financial obligations consistently. This demonstrates reliability to investors, lenders, and clients, attracting new business opportunities while securing the financing required to pursue them.

How do you create cash flow forecasts?

There’s a lot that goes into creating accurate cash flow forecasts. Here’s a breakdown of the most essential steps: 

Verifying and Gathering Data

The foundation of any reliable forecast is high-quality, up-to-date data. Using outdated or unreliable sources will inevitably lead to inaccurate forecasts, potentially compromising financial decision-making. As the saying goes, “garbage in, garbage out.”

Before creating your forecasts, ensure these key data sources are accurate and current:

• Accounting software: Your primary source for historical financial data, including past revenues, expenses, and cash flow patterns.
• Project management tools: These provide insights into project timelines, milestones, and resource allocation—all of which directly impact cash flow.
• Specialized construction software: Systems like Siteline offer real-time visibility into pay applications, change orders, and lien waivers, providing crucial data for accurate forecasting.

Preparing Forecasts

With reliable data in hand, the next step is to create cash forecasts for each ongoing project. These individual forecasts can then be consolidated to provide a comprehensive view of all the cash coming in and going out across all your projects.

1. Choose your forecasting methods.

While spreadsheets have been the go-to tool for many years, specialized software is becoming increasingly essential for its ability to create quick, visual, and shareable projections using existing data.

For example, Siteline simplifies cash forecasting by helping you determine the best projected payment date based on your data and the project’s history. It can also automatically pull payment terms from your ERP (if integrated).

2. Calculate cash flow estimates.

The key to calculating cash flow projections is to combine historical data, current financial positions, and near-term expectations. Here’s the breakdown of the process:

• Start with your current cash flow position: Begin with the actual cash balance in your accounts. This forms the foundation of your forecast.
• Add expected cash inflows: List all anticipated near-term cash receipts, including payments completed for billed work, progress payments expected based on billing cycles, and any other expected income (e.g., tax refunds, asset sales). For forecasts that go further than two or three months out—including forecasts for billings that aren't yet outstanding invoices—you'll want to discount those cash projections to account for the fact that they may be inaccurate or may not materialize. We recommend this only if you’ve established solid billing forecast methods.
• Subtract expected cash outflows: Account for all upcoming expenses, such as payroll, lower-tier payments, material purchases, equipment rentals, overhead costs, and loan payments (or similar financial obligations).
• Determine ending cash: Calculate the ending cash balance for each period (e.g., week or month) by adding the expected inflows and subtracting the expected outflows from the beginning cash balance. 

3. Consider these key factors.

Factor in these key variables for more accurate forecasts:

• Payment terms: Different clients have varying payment schedules, impacting when you receive cash.
• Project timelines: Understanding the phases of each project helps predict cash inflows and outflows throughout the project’s duration.
• Historical patterns: Use past data to inform expectations. For example, if certain clients consistently pay late, adjust your forecast accordingly.

4. Leave room for surprises.

Construction is inherently unpredictable. To safeguard your projects, incorporate a buffer into your forecasts to account for unexpected expenses or delays. These could stem from:

• Seasonal fluctuations: Many construction projects are affected by seasonal weather patterns, which can impact cash flow. For example, projects might slow down during Michigan winters but pick up in sunny Arizona during the same period.
• Economic indicators: Factors like interest rates and material costs can significantly influence your projections.

Reviewing and Adjusting

Creating cash forecasts isn’t a one-and-done thing; they’re an ongoing process. Therefore, regularly reviewing and updating your forecasts is important to account for changes in the project timeline, material shipments and costs, and changes to the scope.

To assist you with this:

1. Set up a routine. Establish a regular schedule for reviewing your forecasts against actual cash flows—ideally, weekly for short-term forecasts and monthly for medium- to long-term forecasts.
2. Identify variances. Look for discrepancies between forecasted and actual cash flows. Understanding these variances can help you improve future projections and identify potential issues earlier on.
3. Adapt to changing circumstances. The construction industry is dynamic, with projects often facing unexpected challenges or opportunities. Your forecasting process should be flexible enough to accommodate these changes quickly.

Regarding the last point, some subcontractor billing teams will continuously extend their forecast horizon, adding new periods as previous ones are completed rather than creating a single forecast for a specific period. Referred to as rolling forecasts, this method enables you to: (a) maintain a more up-to-date and accurate picture of your cash flow; and (b) respond more quickly to changes in your business environment.

What are some other tips for creating cash forecasts?

We’ve already covered quite a few best practices throughout this article. Consider these remaining tips as additional food for thought as you begin to establish—or finesse—your current forecasting process.

Tracking Actuals

We touched on this earlier when discussing the importance of reviewing and updating your forecasts—think of this step as a precursor to that. Regularly comparing your actual income and expenses against your forecasted figures is crucial to identifying any discrepancies and making necessary adjustments to your budget. It will also provide you with valuable insights to fine-tune future forecasts, keeping your cash flow projections accurate even as circumstances change.

Stress-Testing

While forecasting tools are powerful tools, they are not infallible. Regularly conduct stress tests on your forecasting model to assess its resilience under various scenarios. Stimulate extreme conditions, such as project delays, payment defaults, or sudden price increases. This practice helps identify potential vulnerabilities in your cash flow management, prepare for potential challenges, develop contingency plans, and, ultimately, make more informed financial decisions.

Leveraging Technology

Managing complex cash flow projections across multiple spreadsheets is no longer the only option—nor is it the most efficient. Modern technology offers powerful, cloud-based tools that can revolutionize your approach to cash flow forecasting.

With Siteline, for instance, you can:

• Run super-fast forecasts to gain deeper, real-time insights into your cash flow
• Better predict payment timelines, improving your ability to manage working capital
• Enable controllers, CFOs, and other stakeholders to quickly create and share visual representations of project financials
• Utilize historical data to identify trends and patterns that might be missed in manual analysis

If you’re tired of cash flow surprises, it’s time to consider a different approach. Siteline gives you the financial clarity you need with real-time data, a user-friendly design, and integrations with the tools you already use. See for yourself by scheduling a demo here.