Like every contractor, you want to have a good 2018. And this objective should be eminently doable as long as you stay within your strengths, manage your financials carefully and do good work. But why settle for a good year when it could be great? The key, always, is cash flow. The more working dollars you have to work with, the more power you possess to control your own, profitable destiny. To that end, here are three cash flow boosters to consider.
1. Well-crafted contracts
When you think about money problems, your mind might immediately go to the end of the construction process when you’re trying to get paid. But the seeds of monetary discontent are often sown before a shovel hits the dirt. Case in point: the contract’s payment terms. In the broadest terms, contractors have two basic options:
- Payments are received upon completion of specific job phases.
- Payments are remitted in equal installments over the course of the project.
If you’ve been accepting one or the other without question, consider the negative impact on your cash flow. Receiving payments on completion puts you at the mercy of the many random events that can delay a project. Meanwhile, the installment approach may leave you underfunded at key moments. You might try renegotiating the payment terms if either approach has been a problem.
Also review a contract’s payment terms in light of the owner. Does the language seem equitable given the company’s financial strength and creditworthiness? Don’t stop there, either — assess the capacities of suppliers and vendors as well. And, as a job gets underway, try to establish a good working relationship with the owner’s accounts payable representative to ensure the payment terms will be followed.
Another contract issue to scrutinize carefully is retainage. You may think you’re in control of the cash flow from a job until you realize that 5% or 10% of retainage is going to take a while to arrive. Check your state laws and remember that effective renegotiation can have a positive impact.
Additionally, a common modification to retention contract provisions is to have the 10% retention withheld decrease to 5% when the job nears completion. The owner still maintains financial leverage while the contractor frees up cash flow.
2. Prescient financial forecasting
To the extent possible, establish financial forecasting processes that minimize the chances of an unforeseen cash flow slowdown. One best practice is to set forth a carefully planned, front-loaded billing schedule so you can start strong and know when to expect dollar inflows. Try to create a billing cycle that brings in money as soon as possible after each major expense.
For instance, let’s say you know you’ll need to rent, lease or buy an expensive piece of equipment at the six-week point of a job. If you can procure a payment at the sixth or seventh week, you’ll be able to recoup those dollars as quickly as possible. This is how forecasting can help you stay in an optimal cash position.
And make no mistake — financial forecasting is a skill that every construction company must develop over time. It’s not something that happens overnight. Make an ongoing effort to gather and organize job data into dynamic, usable information that you can apply to future projects.
The good news is that technology is your friend. A variety of financial management software products offer forecasting functions. Also, your CPA can help you identify and track the right numbers to keep you informed.
3. Intensive invoicing
Of course, it’s indisputable that cash flow issues often originate with owners. Whether people or companies, project owners will typically delay payment as long as possible to benefit their own cash flows. Meanwhile, your unpaid invoices pile up and your cash flow drags.
One general rule of thumb says that contractors must live with getting paid within 60 to 90 days. But, to boost cash flow, set a company objective to whittle that down to 50 days. The nuts and bolts of precisely how to do so will vary on the type of construction work you do and the structure of your contracts. But there are certain tried-and-true procedures that can help. Use an electronic billing system to invoice owners instantly. Revise your invoice so they clearly express terms, amounts and consequences for tardy payments.
Moreover, abide by that old expression: Know thy customer. Familiarize yourself with each owner and scale your invoicing procedures to suit the situation. With some owners, a clear invoice alone will do the trick. But others may call for a more hands-on approach. This is particularly true when dealing with an owner that has given you payment problems in the past. In these cases, make an extra effort to invoice them on time and be prepared to follow up diligently.
The challenge ahead
For construction companies, every year brings changes to the industry, economy and your local market that affect profitability. This year, look to meet that challenge head on by keeping your cash flow as strong as it can possibly be. Frazer, LLP is ready to advise you on ways to boost your cash flow. Please contact us for help.
Brian Tunnelle, CPA, CGMA, MBA, CCIFP