Take a proactive approach to money management and ensure a steady cash flow by following these helpful tips.
As the expression goes, "Cash is king." A steady cash flow can make or break a business-especially in the construction industry.
As contractors, your projects are typically front-end loaded with cash outlays. You must make huge payments before you receive any cash infusions. Paying for materials and labor (including payroll taxes and benefits) before the job begins or as it progresses can be challenging. It is critical that you analyze your finances carefully to determine whether you can afford to finance a project before committing to it.
Factoring in Payment Delays
Your type of contracting business can significantly impact when you get paid on a job. If you perform the excavation and complete your work at the beginning of the project, you typically get paid as the next phase of the project begins.
Avoiding Payment Delays
There are a number of ways to avoid payment delays. Know how to negotiate your contracts from the beginning to protect your construction business. This is particularly important if you have high product costs. During the negotiations with your customers, you need to make sure that you will receive payment for labor once the labor for a particular phase of the job has been completed. It can be a big mistake to wait for payment until the project is completed. You may end up financing the job instead of the customer, which will be detrimental to your cash flow.
Additionally, if schedule delays arise that are outside of your control, you need to make sure you incorporate potential storage costs into your contract.
Be clear on your payment submission dates. Most contracts have two payment days a month, often the 10th and the 25th. You need to make sure you submit your bills and all associated paperwork before those dates and follow up with the customer's accounting department to make sure they have received all the necessary information. If you have missed a form or piece of information, you will not get a check when you expect it. If you wait until after the payment date to determine where your check is, you will likely have to wait until their next scheduled payment day. The customer has no incentive to chase down the missing information or forms-the money due to you is sitting in their bank.
Lastly, make sure you understand the terms for the release of retention and proactively manage those terms. If a 30-day walk-through is required to get your retention, for example, then make sure it is completed. If there are any open items associated with your work, resolve them immediately. Do not put the responsibility on your customer. Take the initiative to protect your cash flow.
It is extremely important to understand the terms of a contract before signing it. You must make sure the terms are accurate and realistic. Based on these terms, determine if you can truly afford to take the job, even if the profit looks good. Three major mistakes can put your business in jeopardy:
- Not being properly prepared financially to float the cash flow on the job
- Not being prepared for additional cash outlays due to change orders
- Not being able cannot pay your subcontractors/employees
Most construction business management software products today provide the capability to help you manage cash flow. You must actively use the cash flow features in these products to properly track your cash flow schedule. Knowing when you will owe money to your suppliers and when payroll is due versus when money is expected to come in is critical. To be safe, you should always add days (we suggest 60 days) to the expected payment receipt date and have alternate financing in place for each project (i.e. lines of credit or cash in the bank) to cover shortfalls.
Taking the time to understand the terms of the contract and scheduling out your cash flow realistically can make a huge difference in the profitability and security of your business.
5 Quick Cash Flow Tips
- Understand the Terms - Take the time to understand the payment terms in the contract for both the primary payments and retention before you commit to the contract.
- Get Paid Upon Receipt of Product - Before you sign the contract, negotiate payment for goods upon receipt of product, rather than upon installation.
- Include Storage Costs - Incorporate storage charges for products into the contract terms, in case there are project delays outside of your control.
- Double Check Payment Requests - Follow-up with payment submissions to be sure they have been received and are complete.
- Plan for Delayed Payments - Use reporting features available in your software to anticipate gaps in cash flow and be realistic about the amount of time it takes to receive payments.
Construction Business Owner, November 2010