Cash flow is just as important to a contractor's business as profitability.
As a contractor, there are many things you can do to enhance your cash flow. In order for your company to succeed, you need the strategies and tactics to stimulate that growth. By adopting some of the following strategies, you will be able to enhance your cash flow and improve your overall business.
Cash Flow Strategies
To improve cash flow, boost cash reserves and strengthen borrowing capacity, there are some preliminary actions that must take place. Your company should maintain general, payroll and money market accounts. Having each of those accounts will allow you to budget properly and use your capital wisely. You should apply a retention to payments to subcontractors that corresponds to the retention applied by the owner. Be sure that change orders and claims are billed and collected as soon as possible after they are approved. When claims and delinquent change orders arise, make sure that those "delayed payments" include the cost for cash. The owners' delay in paying you should not cost you money. You must establish adequate credit lines and secure long-term financing for fixed asset purchases. Get involved in your tax planning process.
Contracts
No matter the size or type of job, you must have a contract in place. The contract is a roadmap of how you will get paid, when you will receive payment and what is involved in that process. You need to be familiar with all contract terms. In order to further the billing or the collection process, the contract should map out when to submit requisitions and the supporting documentation needed to be submitted with the requisition. Also, it is very important to review the contract's cash flow and ensure "positive money" is included in the earlier stages of the job. By doing so, you will keep the project funding itself and not require additional cash. You must evaluate the cash flow impact of payment terms and retention release provisions. Make sure all questions and/or concerns are resolved before signing a contract because the pre-contractual period is your best opportunity to negotiate terms.
You should have a Contract Abstract, which explains the terms of the contract in a succinct fashion. This can be used as a reference tool should any contract problems arise. You should eliminate all barriers to payments. By knowing the details of the contract and following them exactly, you will be able to enforce the contract as written. You cannot miss deadlines. Submit all requisitions in a timely fashion and include the proper supporting documentation. Some of the supporting documentation might include: proof of insurance coverage (certificates of insurance); invoices for materials, equipment, or rentals; and certified payrolls. Pay attention to the contract's details. If multiple copies of the requisition are required, make sure you provide them. If you do not follow the specific contract terms, payment can be delayed, throwing a wrench into your cash flow.
Credit worthiness is another important part of the contract process. You need to know if the customer can pay your requisitions up front. Make sure you conduct your due diligence and research your customer's credit worthiness. Whether it is through a local trade organization or by running a credit report, invest the time and effort into researching your business partner. Technology has helped to improve the collections process. Not only does it speed up the collections process, but it also eliminates excuses about the payment being lost in the mail, etc. The quicker the money is transferred to your account, the quicker your cash flow improves.
Paying Bills
No matter what your agreement is, you must pay your subcontractors when required. Some subcontractors give you a price contingent on a payment plan. The law says you must pay when paid. You should always try to take advantage of discounts for paying in a timely manner. For example, a
