How Much Cash Does A Building Company Need?

How much working capital do you need to run a building company?

How much cash should you hold in reserve?

…And can you have too much cash in a business?

The obvious answer is, it depends.

It depends on the size of the building company and if you are planning to significantly grow the business over the next five years, or hold your growth at a steady rate just to cover inflation.

However, if we assume you own a residential building company and your growth rate is between 0% – 25% year on year, then there are some basic principles you can easily apply to your building company.

This will ensure it always has enough cash to pay its bills, as and when they become due and payable, as well as having a reserve fund that will see it through even the most extreme downturn the market can throw at you.

It’s not easy to achieve, and both your accountant and your financial advisor may strongly disagree with this advice. However, failing to follow this advice is the reason why 80% of building companies fail every five years.

The first objective for any building company that focuses on new construction is to ensure they always have enough cash to cover the ‘income in advance’ figure, otherwise known in the industry as ‘work in progress.’