"Cash is King" for Construction Contractors
Understanding the sources and uses of cash can help any contracting business ensure that cash is available to buy necessary equipment, hire personnel and cover operational start up expenses. Here are a few tips that can help you understand and manage cash flow in order to maintain strong working capital for future projects.
1. Understand What Drives Your Cash Flow - Reviewing balance sheets and income statements are very important, but reviewing and understanding your cash flow report will help your contracting business better understand the sources and uses of cash during specific time periods. This will help in better understanding how your cash flow is being used and whether your business is building or draining cash.
2. Actively Manage Cash Payments - Take advantage of discounted payment terms if cash flow allows. 2% discounts if paid in 10 days can reap serious cash flow rewards over a one year period. If cash flow is tight, consider bartering for services or delaying payments as long as the payments are within terms.
3. Manage Monthly Expenses - Review recurring expenses to ensure they are needed or can be reduced. Manage peaks in workload through the use of LEAN office services, outsourcing or using temps. Consider changes in lease agreements for vehicles and equipment and review regularly monthly service plans on cell phones, internet, etc.
4. Have Other Sources of Financing Available - In the event that cash on hand does not cover investment needs for equipment, etc., ensure that other sources of financing are available to help with short term cash flow needs. Other sources of financing could be lines of credit with financial institutions or term loans that range from 3-18 months.
5. Collect Receivables Timely - Ensuring that clients stay within payment terms will ensure that you are not financing their project. Offer discounts where necessary to collect cash faster. Ask for partial payments up front or larger initial payments on projects. Offer different payment options such as credit cards. There is no risk to you of the customer overdrawing their account or a delay caused by mail service from checks.
6. Review Collection Process - Look for ways to better improve the collection process. Understand customer preferences for billing. Can the invoice be emailed versus mailed? Is all contact information for the customer up to date to ensure timely receipt of the invoice?
7. Don't wait until it is to late on delinquent receivables to collect. Use a reputable collection agency to step in an collect receivables when they meet the credit term limits. This will let customers know that late payment is not acceptable.
Feel free to reach out to Capital for Contractors if your contracting business is seeking additional working capital. We offer business loans, lines of credit, and AR factoring.