Small adjustments made today can add up to big savings tomorrow for your construction business.
As the threat of a double-dip recession looms, businesses must prepare for uncertain market conditions. Many business owners often focus on day-to-day operations instead of spending time effectively monitoring cash flow. But cash flow is one of the most vital measures of business performance.
Access to credit remains difficult to attain—demonstrating that your business has adequate cash flow can help you secure a line of credit. Maintaining cash on hand will also allow your business to continue operating if your credit request is unsuccessful. The old adage, “cash is king,” rings even more true these days.
As you organize and compile your records for tax filing, determine how you can improve your bottom line and maximize cash flow. Evaluate how to improve operating efficiencies, reduce expenses and maintain as much cash as possible. Focus your resources on things that will provide tangible benefits to your bottom line. Making the necessary adjustments will not be easy, but the result will be worth it.
1. Project and Budget
Projecting and managing your company’s cash flow is a critical process. Take the time to project what your cash flow will look like for the year ahead. This is similar to preparing a budget, and like budgeting, it is also one task that busy entrepreneurs often neglect. After you establish your annual operating budget, estimate each month’s expected income and expected expenses.
As with all business statistics, cash projections will only be useful if you keep them current. You can also take advantage of different resources to help you make accurate projections. Many accounting programs offer straightforward cash management tools that can help you create these projections based on a prior period’s actual figures, and then they make adjustments for known variations.
Compare your actual results against projections, and adjust for any significant gaps. Having enough cash to cover payroll and other business expenses will give you peace of mind.
2. Streamline Your Cash Flow Management Process
Many programs are available that can help you maintain accurate and current books. Technology provides real-time updates of your current financial position and cash on hand. With the proper resources, you can automate and optimize your operations to improve billing and pay expenses in a timely manner. Avoiding penalties and reducing finance charges will maximize your cash flow.
For example, when you purchase materials and supplies for a pending project, you could negotiate a four- to six-week payback structure, rather than shelling out a large amount of cash initially. In many cases, it is the general contractor’s responsibility to pay for material costs, and the general contractor typically does not receive compensation until the final invoice is sent (months later). Spreading out the costs over a longer period will diminish the hit to your cash flow.
3. Renegotiate Vendor Contracts
When acquiring big-ticket items, such as equipment or machinery, look for any available tax credits, and alter the payment schedule to minimize the net bill. Recent legislation allows capital investments to be 100 percent tax deductible through 2011. Aside from tax savings, negotiate the terms of all major purchases to reduce your overall cost. Bid the purchases to several dealers to get the best value. Your vendors appreciate your business and will work with you to ensure your satisfaction. Altering the structure of a deal can create significant savings.
When you need new equipment or machinery, it may be wise to lease rather than purchase depending on the size of your company. Leasing will require less short-term cash. But if you choose to buy, pay off the loan quickly to avoid massive finance charges.
4. Balance the Use of Subs and Hired Staff
Payroll, your most significant expense, occurs every two weeks. But when hiring subcontractors, you generally have a four-week period before you have to pay the invoice. Balancing the use of subs and your general staff can be complicated. Producing safe, quality work is necessary to maintain a solid reputation and prevent accidents, setbacks and unexpected expenses to redo work. Using subs can improve your cash flow because of the flexible payment structure, but you cannot solely rely on subs for every project.
You also must control labor costs by monitoring your workers’ activities—be strict with time cards, and limit unnecessary overtime.
5. Bill and Collect
Bill all of your clients promptly, and ensure timely collections. Have an organized and automated approach, and issue invoices in advance to allow adequate response time. Consider hiring a specialist if you have difficulty with collections.
Maximizing cash flow can result in long-term savings and streamline your operations. Take time now to improve your cash before next year.
Implementing a cash flow management system will save you money in many tangible ways.
The processes and procedures that you put in place will ensure that you bill and collect in a timely manner. This will allow you to pay your suppliers on time and avoid any additional charges.
Budgeting and tracking expenses will be more effective because you will know where you stand and what you can and cannot afford at all times.
Your income and expenses will be prioritized and automate many of the tedious tasks that cost a significant amount of money to accomplish.
Construction Business Owner, November 2011 Issue