You can be an excellent craftsman, a great project manager, and a wonderful communicator — but if you do not manage your finances properly, your business will fail. Financial management is the discipline of tracking, understanding, and controlling the money that flows in and out of your company.

Today we’ll cover the financial fundamentals every new residential contractor must master: cash flow, job costing, banking, taxes, and how to read the basic financial picture of your business.

Important Truth: Most construction businesses that fail do not fail because of bad craftsmanship. They fail because of poor financial management — running out of cash, under-pricing jobs, or failing to track costs until it is too late.

What Is Cash Flow?

Cash flow refers to the timing of money coming into and going out of your business. A business can be profitable on paper but still run out of cash — this is one of the most common reasons small contractors fail.

In construction, cash flow problems arise because:

• Customers pay in installments over weeks or months.
• You pay workers and suppliers before the final payment comes in.
• Retainage (typically 5% of contract value) is withheld until job completion or contract requirement.
• Change orders add cost before additional revenue is collected.

Managing Cash Flow on Your Jobs

The best tool for managing cash flow is a payment schedule that keeps pace with your costs.

Setting Up Payment Schedules

Never start a job without a deposit. A typical payment structure for a residential remodel or small addition may look like this:

Item	When Due
Deposit (25%)	Collected before work begins. Covers initial material purchases.
Progress Payment (30%)	Due at a defined milestone, such as rough-in completion.
Progress Payment (30%)	Due at another milestone, such as finishes installed.
Final Payment (15%)	Due upon job completion and customer walk-through sign-off.

Note: A contractor should build a good team of professionals from the start. A good team consists of an attorney, a CPA and a helpful insurance agent. You will need all of these professionals in your construction career. Speak with your attorney or CPA about a workable payment structure for your company based on your specific types of jobs.

Additional cash flow strategies:

• Collect deposits before ordering materials — never finance a customer’s project.
• Bill promptly at each milestone — do not wait days after a milestone to send an invoice.
• Maintain a cash reserve of at least 3 months of operating expenses in your business account.
• Set up a business line of credit with your bank before you need it.

Simple Rule The goal is to always have more money coming in than going out. Bill early, collect promptly, and pay suppliers on the last possible day their terms allow.