Working Capital Management

Document Type: Guide
Version: 1.0
Last Updated: February 2026
Distribute To: CFO, Controller, Owner

Purpose

Establish procedures for managing working capital to ensure adequate liquidity for operations, growth, and financial stability.

Why Working Capital Matters

Construction Working Capital Reality:

You finance projects before getting paid
Retainage ties up 5-10% for months
Growth requires more working capital
Bank covenants require minimum levels
Surety capacity depends on it

Working Capital Formula:

Working Capital = Current Assets - Current Liabilities

Current Assets:
+ Cash
+ Accounts Receivable
+ Costs in Excess of Billings (underbillings)
+ Inventory (if any)
+ Prepaid Expenses

Current Liabilities:
- Accounts Payable
- Billings in Excess of Costs (overbillings)
- Accrued Expenses
- Current Portion of Long-Term Debt
- Line of Credit

Working Capital Targets

Industry Benchmarks (CFMA):

Metric	Minimum	Target	Strong
Working Capital	5% of revenue	8-10%	12%+
Current Ratio	1.1x	1.2-1.3x	1.4x+
Quick Ratio	0.8x	1.0x	1.2x+

Your Targets:

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         WORKING CAPITAL TARGETS
================================================================

Annual Revenue Target: $_________________

Working Capital:
  Minimum (5%): $_________________
  Target (10%): $_________________
  Growth target: $_________________

Current Ratio:
  Covenant minimum: _____
  Target: _____

Quick Ratio:
  Target: _____

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Working Capital Analysis

Monthly Working Capital Report:

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         WORKING CAPITAL ANALYSIS
================================================================

As of: _______________

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CURRENT ASSETS:

Cash and equivalents: $_________________
Accounts receivable:
  Billed: $_________________
  Retainage: $_________________
Costs in excess of billings: $_________________
Inventory: $_________________
Prepaid expenses: $_________________
Other current: $_________________

TOTAL CURRENT ASSETS: $_________________

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CURRENT LIABILITIES:

Accounts payable:
  Trade: $_________________
  Subcontractors: $_________________
  Retainage payable: $_________________
Billings in excess of costs: $_________________
Accrued expenses:
  Payroll: $_________________
  Taxes: $_________________
  Other: $_________________
Current portion LTD: $_________________
Line of credit: $_________________
Other current: $_________________

TOTAL CURRENT LIABILITIES: $_________________

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WORKING CAPITAL: $_________________

Current Ratio: _____ (CA ÷ CL)
Quick Ratio: _____ ((CA - Inventory - Prepaids) ÷ CL)

As % of trailing 12-month revenue: _____%

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TREND:

| Month | Working Capital | Current Ratio | Change |
|-------|-----------------|---------------|--------|
| 3 months ago | | | |
| 2 months ago | | | |
| Last month | | | |
| Current | | | |

================================================================

Working Capital Components

Cash Conversion Cycle:

Cash Conversion Cycle = DSO + DIO - DPO

DSO (Days Sales Outstanding):
  AR Balance ÷ (Annual Revenue ÷ 365)
  
DIO (Days Inventory Outstanding):
  Inventory ÷ (COGS ÷ 365)
  (Usually minimal for construction)
  
DPO (Days Payable Outstanding):
  AP Balance ÷ (Annual Purchases ÷ 365)

Construction Example:
  DSO: 45 days (billing to collection)
  DIO: 5 days (minimal inventory)
  DPO: 30 days (payment to suppliers)
  
  Cycle: 45 + 5 - 30 = 20 days

You're financing 20 days of operations at any time.

Component Analysis:

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         WORKING CAPITAL COMPONENTS
================================================================

ACCOUNTS RECEIVABLE:

Total A/R: $_________________
DSO: _____ days
Target DSO: _____ days
Variance: _____ days = $_________________ tied up

Aging:
| Bucket | Balance | % |
|--------|---------|---|
| Current | | |
| 31-60 | | |
| 61-90 | | |
| over 90 | | |

Action: _________________________________________________

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RETAINAGE RECEIVABLE:

Total retainage: $_________________
By expected release:
  30 days: $_________________
  60 days: $_________________
  90+ days: $_________________
  Disputed: $_________________

Action: _________________________________________________

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COSTS IN EXCESS (UNDERBILLINGS):

Total underbillings: $_________________
By project:
| Project | Amount | Cause | Action |
|---------|--------|-------|--------|
|         |        |       |        |

Systemic issues: _________________________________________

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ACCOUNTS PAYABLE:

Total A/P: $_________________
DPO: _____ days
Target DPO: _____ days

Vendor terms optimization:
| Vendor | Current Terms | Available Terms | Action |
|--------|---------------|-----------------|--------|
|        |               |                 |        |

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BILLINGS IN EXCESS (OVERBILLINGS):

Total overbillings: $_________________
This is "free" working capital - use strategically!

Sustainable level: $_________________
At risk of reversal: $_________________

================================================================

Working Capital Improvement

Strategies by Component:

Accelerate Cash Inflows:

Strategy	Implementation	Impact
Bill immediately	Same day as milestone	Reduce DSO
Reduce disputes	Accurate billing	Reduce delays
Collect aggressively	Weekly follow-up over 30 days	Reduce DSO
Retainage focus	Pursue at completion	Free cash
Progress billing	More frequent milestones	Steady inflow
Reduce underbillings	Bill to % complete	Free cash

Manage Cash Outflows:

Strategy	Implementation	Impact
Negotiate terms	Standard 30-day terms	Extend DPO
Pay on due date	Not early	Preserve cash
Vendor consolidation	Leverage for terms	Better terms
Match in/outflows	Time payments to receipts	Smooth cash
Equipment financing	Preserve cash	Reduce outflow

Optimize Balance Sheet:

Strategy	Implementation	Impact
Maintain overbillings	Bill ahead when possible	Free financing
Minimize inventory	Just-in-time materials	Reduce DIO
Review prepaids	Pay monthly vs. annual	Reduce prepaids

Working Capital for Growth

Growth Working Capital Needs:

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         GROWTH WORKING CAPITAL PROJECTION
================================================================

Current annual revenue: $_________________
Current working capital: $_________________
WC as % of revenue: _____%

Projected revenue growth: _____%
New annual revenue: $_________________

Required working capital (at same %): $_________________
Current working capital: $_________________
ADDITIONAL WC NEEDED: $_________________

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FUNDING THE GAP:

Sources:
☐ Retained earnings: $_________________
☐ Owner contribution: $_________________
☐ Increased line of credit: $_________________
☐ Improved operations: $_________________
☐ Overbilling improvement: $_________________

TOTAL FUNDING: $_________________

Gap remaining: $_________________

================================================================

Working Capital Rules of Thumb:

Revenue Growth	Additional WC Typically Needed
10%	8-12% of growth amount
20%	10-15% of growth amount
30%+	12-18% of growth amount

Example:

$10M revenue growing 20% = $2M growth
Additional WC needed: $2M × 12% = $240,000

Line of Credit Management

LOC and Working Capital:

LOC provides temporary working capital, not permanent.

Good use:
- Bridge timing differences
- Seasonal fluctuations
- Short-term growth funding

Bad use:
- Permanent working capital substitute
- Covering operating losses
- Funding long-term needs

Warning signs:
- LOC always maxed
- Can't pay down even in good months
- Using LOC for payroll regularly

LOC vs. Permanent WC:

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         WORKING CAPITAL STRUCTURE
================================================================

Total working capital needed: $_________________

Permanent working capital: $_________________
(Equity-funded, always needed)

Seasonal/variable needs: $_________________
(Can use LOC)

Current LOC capacity: $_________________

Structure assessment:
☐ Adequate - LOC covers variable needs only
☐ Stressed - LOC covers some permanent needs
☐ Critical - LOC maxed, still short

Action needed: _________________________________________

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Banking Covenants

Working Capital Covenants:

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         COVENANT COMPLIANCE CHECK
================================================================

MINIMUM WORKING CAPITAL:

Required: $_________________
Actual: $_________________
Cushion/(Shortfall): $_________________
Compliance: ☐ Yes  ☐ No

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CURRENT RATIO:

Required: _____
Actual: _____
Cushion/(Shortfall): _____
Compliance: ☐ Yes  ☐ No

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TANGIBLE NET WORTH (often WC-related):

Required: $_________________
Actual: $_________________
Cushion/(Shortfall): $_________________
Compliance: ☐ Yes  ☐ No

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If non-compliant or at risk:
1. Project when issue will occur
2. Identify remediation options
3. Contact bank proactively
4. Request waiver if needed

================================================================

Surety Implications

Working Capital and Bonding:

Bonding capacity is influenced by:
- Working capital level
- Working capital trend
- Quality of working capital
- Current ratio

Rule of Thumb:
Single job limit ≈ 10-15× working capital
Aggregate limit ≈ 20-30× working capital

Example:
WC of $500,000 might support:
- Single: $5-7.5 million
- Aggregate: $10-15 million

Working Capital Quality:

High-quality working capital:
+ Cash
+ Receivables from good customers
+ Minimal underbillings
+ Low retainage

Lower-quality working capital:
- Old receivables
- Large underbillings
- Concentrated receivables
- Related party receivables

Monthly Review Process

Working Capital Dashboard:

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         MONTHLY WORKING CAPITAL REVIEW
================================================================

Month: _______________

| Metric | Target | Actual | Status | Trend |
|--------|--------|--------|--------|-------|
| Working Capital | $ | $ | ☐ ☐ ☐ | ↑ ↓ → |
| Current Ratio | | | ☐ ☐ ☐ | ↑ ↓ → |
| Quick Ratio | | | ☐ ☐ ☐ | ↑ ↓ → |
| DSO | days | days | ☐ ☐ ☐ | ↑ ↓ → |
| DPO | days | days | ☐ ☐ ☐ | ↑ ↓ → |

Status: ☐ Green (above target)  ☐ Yellow (at target)  ☐ Red (below)

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KEY CHANGES THIS MONTH:

Improved: ________________________________________________
Worsened: ________________________________________________
Actions taken: ____________________________________________
Actions needed: ___________________________________________

----------------------------------------------------------------

FORECAST:

Next 3 months expected trend: ☐ Improving  ☐ Stable  ☐ Declining
Covenant compliance expected: ☐ Yes  ☐ At risk

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Cash Flow Forecasting
Banking Covenant Compliance
Accounts Receivable Procedures
Financial Reporting

Template provided by support.construction. Working capital is the lifeblood of a construction company—manage it or die.

Purpose​

Why Working Capital Matters​

Construction Working Capital Reality:​

Working Capital Formula:​

Working Capital Targets​

Industry Benchmarks (CFMA):​

Your Targets:​

Working Capital Analysis​

Monthly Working Capital Report:​

Working Capital Components​

Cash Conversion Cycle:​

Component Analysis:​

Working Capital Improvement​

Strategies by Component:​

Working Capital for Growth​

Growth Working Capital Needs:​

Working Capital Rules of Thumb:​

Line of Credit Management​

LOC and Working Capital:​

LOC vs. Permanent WC:​

Banking Covenants​

Working Capital Covenants:​

Surety Implications​

Working Capital and Bonding:​

Working Capital Quality:​

Monthly Review Process​

Working Capital Dashboard:​

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