In brief
• Growth uses cash before it produces it, especially where costs are paid well ahead of progress claims.
• Judge new work by when it pays, not only by its margin.
• The same pattern resurfaces at sale, as an argument about working capital.
The owner of a civil contracting business showed me a pipeline most owners would envy. Revenue was up about 40% on the previous year, the crews were flat out and two of the largest projects in the firm's history had just been won. Then he showed me the cash flow forecast. The business was heading for its $750,000 overdraft limit within about ten weeks.
Nothing was wrong with the work. The problem sat in the gap between paying for it and being paid.
It isn't a profit problem. It's a timing problem.
Wages went out weekly. Materials, equipment hire and subcontractors were paid monthly. Progress claims went in at month end, took two to three weeks to be approved and were then paid on 30-day terms, with a retention held back on each one until completion. Every new project looked profitable on the estimate, and every one needed a large amount of cash before it returned any.
Owners naturally judge a job by its margin, and that matters. But a job with a good margin can still strain a business if most of its costs are paid two or three months before the money comes in. Win two of those at once and the bank account notices long before the profit and loss does.
Look at each job, not the order book
We went through the larger projects one at a time:
• When would labour and materials actually be paid?
• When could the first claim go in, and how long did approval usually take?
• What had been retained, and when would it be released?
• Were variations documented and claimed as they arose, or left until the end?
The last question mattered more than he expected. There was close to $200,000 of agreed variation work across three jobs that hadn't been claimed. Nobody had been careless. Everyone had simply been busy building.
That picture was far more useful than the total value of the order book. It showed how much cash the work already won would need, and when.
What changed
He began reviewing cash flow alongside job profitability every fortnight. A rolling 13-week forecast made pressure visible a couple of months out rather than a couple of days. The job reviews caught claims that hadn't gone in and variations still waiting on paperwork.
We also looked at the terms on new work. Could a large upfront materials purchase be built into the first claim? Were payment milestones clear in the contract? Was the business about to take on several cash-hungry projects in the same quarter?
None of this meant turning down good work. It meant knowing what each job would ask of the business before committing to it.
Why a buyer will ask the same question
Importantly, this doesn't stay an operational issue. When a business like this is sold, the buyer generally expects a normal level of working capital to be left in it at completion, enough to keep trading without putting in fresh money. If the business has been funding growth by paying suppliers later and leaving variations unclaimed, what counts as "normal" becomes a negotiation, and it tends to be settled against the seller.
A contractor that can show steady debtors, claims lodged on time and a forecast it genuinely uses gives a buyer far less to discount.
The warning signs
They're easy to miss when everyone is busy. Receivables creep up. Suppliers get paid a little later each month. You check the bank balance more often than you used to. And on paper, you're having a very good year.
If that sounds familiar, the questions are worth asking now: how much cash does the work you've already won need, when will it come back and what happens if your largest customer pays a month late? Growth should leave a business stronger. If every new job makes cash tighter, it's worth finding out why before you win the next one.
If your business is growing but cash is still under pressure, I'm happy to have a confidential conversation about what may be happening and the practical options.
About the author: Greg Johnson is a CPA, Certified Exit Planning Advisor, Licensed Business Broker and Registered Business Valuer, and Founder and Managing Partner of Ascend Partners. Client examples are composites, with details changed to protect confidentiality. This article was prepared with AI support from my own experience and direction; the observations are mine.