If you’ve ever heard the term, “cash is king,” you should know that this term especially applies to those in the construction and contractor business. The reason why is two projects are rarely the same and a generally a sizable investment is required before the project(s) produce income. This common situation can create a cash flow issues demanding companies create a solid cash flow strategy or risk the consequences. Unfortunately, without proper planning cash flow management can be a serious issue for industry companies. Without cash, business owners can’t reinvest in their companies – and are therefore unable to grow. When funds are tied up, construction companies are unable to capitalize on new opportunities because they can’t pay more employees or invest in new physical assets. It can also be more difficult to afford the materials best suited for a particular project. Cash flow problems can eventually include loss of business solvency and dissolution.
Cash Flow Management Tips
While certain things may be out of your control – such as labor intensive work or slow payers – consider the following tips to ensure your construction business is poised for growth with a cash flow plan and proactive strategy.
- Shorten your billing cycle. If you don’t have standard procedures to issue invoices on a timely basis when a project – or portion of a project – is completed, there can be issues. Some public agencies pay with a 45-day remittance period, and you’re sure to encounter some “late payers,” so if it takes your company 30 days to issue an invoice, you are out that cash – already put into materials and likely labor – for 75 days or more in some cases. The time from project completion to billing is squarely in your control. Shorten this as much as possible to improve cash flow. Be sure to avoid over-billing, which can result in “borrowing” from one job to pay another, or under-billing because of poor planning.
- Revamp payment terms and conditions. Along the same lines, you might want to consider asking clients to agree to front-loaded contracts. This will help you avoid paying employees and purchasing materials out of your own pocket – or being forced to delay the next step in a project – while you wait for payment. At the end of the day, your customers ultimately want the job done right, so a little more cash upfront will help you both. Your customers’ total cash outlay is the same regardless, but you get the cash needed to complete projects and fulfill your end of the bargain to the best of your ability.
- Consider offering a small incentive for clients who pay their invoices early, too. A small percentage discount if payment is sent within 10 days, for instance, may see invoices clearing faster. You’ll have to sacrifice a little bit of revenue for that access to faster cash, but it might be worth it.
- Negotiate your vendor and supplier contracts. It’s important to continually shop your materials, especially before big jobs or as you enter a seasonally busier period. The prices of raw materials fluctuate, and new suppliers enter the market from time to time. If you do find better deals, your preferred supplier will likely meet its competitor’s prices if they are able so you don’t have to sacrifice vendor relationships or reliability for price. General contractors may want to apply retention to subcontractor payments that correspond to the retention applied by the owner as well (for instance, a “pay-when-paid” or “pay-if-paid” clause).
- Don’t schedule yourself too tightly. Project management also requires sticking to a reasonable schedule and not stretching yourself – and your timelines – too thin. You should be flexible enough to complete and bill a job that took longer because of unforeseen circumstances without needing to simultaneously invest in all the raw materials needed to start a new job you’re not entirely ready to begin
- Create a tax planning strategy. Engage a good tax planning professional and educate yourself about the tax planning process, including the tax impact of various business activities, such as buying equipment. Also talk to your accounting professional about depreciation methods for tax purposes that accelerate deductions and decrease tax liabilities. Understanding these strategies and having a solid plan in place is one key to improving cash flow and to the long-term success of your business.
Managing cash flow can be difficult for many and does require discipline in how companies operate. If you would like assistance reviewing company policies to address this issue, Hanson & Co wants to help. For additional information on our cash flow consulting or other construction accounting issues, contact us today! For additional information click here for email or contact us at (303) 388-1010. We look forward to speaking with you soon!