In recent news across the construction industry, a handful of established construction firms with decades of history and tens of millions in annual revenue ended up in bankruptcy court. This did not happen because they lost the ability to build, but because they lost control of their cash. When traditional lenders tightened up, some owners turned to merchant cash advances to bridge payroll or material costs between draws. What looked like a short-term fix became an automated daily withdrawal from the operating account, in some cases consuming a third or more of what came in the door.
One potential approach for helping manage that risk is straightforward: build a reserve. Set aside a portion of gross profit, consistently, until you carry several months of core operating expenses in a separate account. It may be an appropriate first step for any contractor whose balance sheet has grown more complex than a single checking account can manage.
But “build a reserve” is where that conversation often stops. In reality, it is where the real planning work should start. A reserve that sits in an operating account earning little or no interest may represent an opportunity to consider other cash management options. For an owner who has done the hard parts – avoided costly short-term financing, built the discipline, accumulated real reserves – the next question is more interesting. How do you make that capital work without compromising the liquidity that makes it a war chest in the first place?
Liquidity is a Spectrum.
Some owners think in binary terms: cash is either liquid, such as in a checking account, or invested with less immediate access. That approach may result in foregoing potential yield over time. A useful mental model is a ladder of liquidity tiers, each matched to how soon you might actually need the cash available.
At the top of the ladder sits true operating cash: payroll due Friday, this week’s material draw. For that layer, institutional-class money market funds are an option to consider alongside a bank sweep account. Depending on market conditions and the specific account, money market funds may offer competitive yields while maintaining a relatively high degree of liquidity. For cash needed in the near term, owners may want to evaluate available options.
One rung down is capital you are confident you won’t touch for a few weeks to a few months but still want available on short notice. A laddered short-term Treasury bill strategy may be one option to consider here. We build these in rolling maturities so there is always a tranche coming due, and Treasury bills generally trade in a liquid secondary market. Relative yields on Treasury bills can vary, and interest from U.S. Treasury securities is generally exempt from state and local income taxes, which may affect the after-tax return.
Beyond that, for reserves that can tolerate some day-to-day price movement in exchange for more yield or tax efficiency, municipal bond, fixed-income, and dividend-paying equity strategies extend the ladder further. These investments may also provide liquidity but can involve greater market and price risk than money market funds or short-term U.S. Treasury bills.
Finally, for the portion that’s genuinely surplus, or dollars that will not be needed even in a downturn, certain private investment strategies may offer the potential for high income, along with additional risks and liquidity constraints.
The point is not that every contractor needs all of these tiers but rather that the cash reserve is a planning opportunity, not a parking spot. An owner who has already done the discipline of avoiding short-term debt deserves a reserve strategy built with the same intentionality. That is a conversation worth having before the next slow quarter, not during it.
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