How to Read a Construction Balance Sheet to Spot Cash Flow Risks Early
- Cost Construction Accounting
- 5 days ago
- 7 min read
Updated: 1 day ago
As a construction owner, you know the grind: you win the bid, you put in the work, and you see healthy profit margins. But have you ever felt like you’re constantly chasing money? You’re profitable on paper, yet your bank account is perpetually running on fumes. This is the Construction Cash Flow Trap, and it has sunk more profitable companies than market crashes have.
The Balance Sheet is your business’s X-ray. It reveals where cash is getting trapped and where dangerous financial liabilities are building up. For contractors, ignoring these signals is a direct threat to your payroll, your ability to bid on bonded work, and your company's long-term survival.
We’re here to give you the urgent, professional insight you need. We'll show you exactly where to look and what four warning signs demand your immediate attention. Don’t wait for the crisis, use this guide to spot the danger today.
Why Your Balance Sheet Matters More Than Your P&L
According to industry data, 82% of construction business failures stem from cash flow problems, not lack of work. You can have a full backlog, profitable jobs, and still run out of cash to make payroll.
Here's what most contractors miss: Your Profit & Loss shows if you're making money. Your balance sheet shows if you have money. In construction, these are completely different stories.
Construction's cash flow trap works like this:
You bill $100,000 for completed work. Your P&L shows that revenue immediately. But the client holds 10% retainage ($10,000), pays on net-30 ($90,000 delayed), and takes an extra week to process payment. Meanwhile, you paid subs and suppliers last Friday because they demanded it.
Result? Profitable on paper. Broke in reality.
Most contractors check job costs daily and review P&L monthly. But the balance sheet? Only during tax season or loan applications. That's the problem.
Let's fix that. Here are four warning signs that appear 30-60 days before a cash crisis giving you time to act.
Warning Sign 1: The Slow-Pay Client Trap
Where to look:
Your AR represents money clients owe you. It should be temporary you bill, they pay, money moves to cash. For many contractors, AR becomes a growing mountain of unpaid invoices.
The warning sign: AR growing faster than revenue.
If your monthly revenue averages $200,000, healthy AR should be $300K-$400K (1.5-2x monthly revenue). If AR sits at $600,000, you're operating as a 90-day bank for clients. That's $200,000+ that should be in your account paying bills.
Red flags to watch:
AR over 60 days exceeds 20% of total AR (collection crisis)
One client represents >30% of total AR (concentration risk)
AR includes disputed amounts (change orders not approved, back charges)
The critical metric: Days Sales Outstanding (DSO)
Target: Under 45 days for construction. Over 60 days = serious problem.
Example: $500K AR ÷ $2.4M annual revenue = 76 days. This contractor waits 76 days on average to collect way too long.
What to do:
Pull your AR aging report today. For every invoice over 60 days, pick up the phone. Not email phone. Find out what's holding up payment. Missing lien waivers? Incomplete paperwork? You can't fix it if you don't know about it.
For invoices over 90 days, implement formal collection. Send demand letters. Stop work if necessary.
Fix your billing process: Invoice within three days of the billing period. Include all required documentation the first time. Follow up at 15, 30, and 45 days.
Quick Win: Call your top three aging clients this week. Ask if anything is holding up payment and how you can help resolve it.
Warning Sign 2: The Retainage Black Hole
Where to look:
Retainage is construction's most insidious cash flow killer. Every contractor knows clients hold back 5-10% until project completion. It feels normal.
But retainage isn't an expense, it's YOUR money being held hostage.
The warning sign: Retainage balance growing quarter after quarter.
Q1: $50K → Q2: $85K → Q3: $125K. This isn't growth, it's a sign you're starting projects faster than closing them. More cash gets trapped with every new job.
Why this kills cash flow:
That $125,000 in retainage can't be used for payroll, materials, or new bids. It's frozen until you complete punch lists and fight through the client's payment bureaucracy.
The growth trap: Grow revenue by 20%, your trapped retainage also grows by 20%. Faster growth = tighter cash flow.
Red flags:
Retainage from projects completed > 60 days ago (punch list delays)
Total retainage > $100K with average age > 90 days
Retainage represents > 30% of AR
What to do:
Create a retainage aging report by project. Treat retainage over 90 days as an emergency.
Schedule punch list completion for your largest retainage amounts this month. That one nagging item is costing you thousands in trapped cash.
Negotiate retainage terms before signing contracts. Try for 5% instead of 10%. Push for early release clauses maybe retainage drops after 50% completion.
Quick Win: Identify your oldest retainage receivable. What would it take to close out that project? A two-hour punch list? Missing documents? Schedule it this week.
Warning Sign 3: The Underbilling Spiral
Where to look:
Work in Progress (WIP) accounting reveals whether you're bleeding cash on projects right now.
Simple version: Compare costs spent vs. amount billed.
Underbilled: Spent more than billed = cash flowing OUT
Overbilled: Billed more than spent = cash flowing IN (temporarily)
Danger A: Large underbillings growing
Example: $200K in costs incurred, only $120K billed = $80K underbilled. You paid subs and suppliers (they demanded immediate payment), but haven't billed the client yet.
That $80K left your bank account but hasn't been replaced. Multiply this across projects, and you're drowning.
Underbillings > 15% of contract value means you're losing control. Either cost overruns, scope creep, or billing delays.
Danger B: Large overbillings (the false security trap)
Example: $150K billed, $80K in costs = $70K overbilled. Client's money is in your account (feels great!), but you still owe the work.
The trap: Contractors spend overbilled money as if it's profit. They use it to cover other projects, pay old debts, or overhead. But when that project completes, you need $70K cash to finish and it's gone.
Danger C: Underbillings on old projects
Project >75% complete but still underbilled? Major cost overruns you may never recover.
What to do:
Request a detailed WIP report monthly. Review every project's costs, billings, and over/under position.
For underbilled projects, submit billing immediately. Bill everything you're entitled to bill, as soon as possible.
For overbilled projects, accelerate work. You've been paid now perform to "earn" that cash.
If total underbillings exceed $100K, you need better job costing or faster billing. This is where CCA's WIP Analysis service helps identify problems while there's time to fix them.
Quick Win: Identify your most underbilled project. Can you submit a progress billing this week?
Warning Sign 4: The Liquidity Squeeze
Where to look:
This ratio reveals overall financial health in one number.
The warning sign: Current ratio dropping month after month.
Q1: 1.8 → Q2: 1.5 → Q3: 1.2 → Q4: 0.9. You're losing liquidity fast.
What the numbers mean:
Below 1.0: You owe more than you have (technically insolvent)
1.0-1.5: Tight, risky
1.5-2.5: Healthy range
Above 2.5: Strong liquidity
Why it drops:
All those warning signs drive your ratio down. Underbillings growing (spending cash without billing). AR aging (assets less liquid). Retainage building (cash trapped). Meanwhile, payables stretch (liabilities grow).
The bonding killer:
Sureties want current ratio >1.5. Trending down means no bonding for public projects cutting off major revenue just when you need it.
What to do:
Calculate your ratio monthly. Track the trend, not just the number.
If declining 2-3 consecutive months, emergency intervention needed. Options:
Accelerate AR collections (offer early payment discounts)
Collect old retainage (finish punch lists)
Reduce discretionary spending
Secure line of credit while you qualify
Quick Win: Calculate your current ratio now using last month's balance sheet. Then calculate the previous two months. Trending up or down?
Your 5-Minute Monthly Health Check
You don't need an accounting degree. Just a simple routine:
AR Check (2 min): Total AR vs. monthly revenue. More than 2x? Problem. What % is over 60 days?
Retainage Audit (1 min): Growing or shrinking? Any amounts > 90 days old?
WIP Review (1 min): Total underbillings vs. overbillings. Which is larger? Underbillings growing?
Current Ratio (1 min): Current Assets ÷ Current Liabilities. Trending up or down?
Create a one-page dashboard tracking these monthly. Traffic light system: Green (healthy), Yellow (watch), Red (act now).
When Warning Signs Appear
1 warning sign: Caution zone. Address within 30 days.
2 warning signs: Urgent. Cash crisis likely in 60 days.
Accelerate AR collections (offer 2% discount for 10-day payment)
Close projects to collect retainage
Slow down bidding temporarily
Talk to banker about line of credit
3-4 warning signs: Crisis mode. Cash crunch within 30 days.
Daily cash monitoring
Prioritize: payroll first, critical suppliers second
Defer owner distributions
Bring in expert help (like CCA)
Catching warning signs early = manageable fixes. Ignoring them = survival scramble.
How CCA Keeps You Ahead of Cash Flow Risks
At Construction Cost Accounting, WIP analysis catches underbilling problems early. We review AR aging and flag collection issues. We track retainage and remind you when projects are ready for closeout.
Through Sage 100 Contractor, we create dashboards showing cash flow health with automated alerts when ratios drop. Our monthly reports include specific red flags and recommended actions not just numbers, but "here's what this means and what to do".
We've helped 150+ contractors avoid cash flow crises by spotting problems early. Your P&L tells you IF you made money. Your balance sheet tells you WHERE your money is. CCA tells you WHAT TO DO about it.
The Bottom Line
Profitable companies go bankrupt. It happens constantly in construction. Full backlogs, positive P&Ls, empty bank accounts. The warning signs are always on the balance sheet first. The only question is whether anyone is looking. Check your balance sheet as often as you check job costs. Cash flow problems don't appear overnight.
Don't know how to get these reports? Balance sheet looks confusing? Not sure if what you're seeing is normal or a warning sign? Construction Cost Accounting specializes in translating balance sheet data into clear, actionable insights for construction companies.
Schedule your free financial health check and find out if warning signs are hiding in your numbers right now.
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