In the world of construction and contracting, cash flow is a constant topic of conversation. Yet, during the winter months, it can feel particularly challenging. With projects delayed by weather, clients slow to pay, and unpredictable conditions impacting our work, managing cash flow becomes as crucial as ever. Poor cash flows can make or break a contracting business. The inability to pay bills or payroll not only puts a ding on your credit rating and negatively affects your ability to acquire capital funding, but also can crush your reputation. It can be particularly disheartening to look ahead to a spring/summer production season ripe with signed contracts, while drowning in a sea of bills and obligations with no winter cash flows in sight.
As a contracting business, there are several reasons that cash flow freezes up (especially in the dead of winter) - but there are steps you can take to get the funds flowing again, and there are preventative measures you can put in place right now so next winter you don't find yourself in famine mode again.
First, it's important to understand what cash flow is, and how you can manage it
What is Cash Flow?
Simply put, cash flow refers to the movement of money into and out of a business over a specific period of time. Cash flow is divided into three activities: Operating, investment, and financing. A positive cash flow allows for reinvestment, on-time payment of vendors, suppliers, and payroll, and investment in company growth. A negative cash flow can hinder financial health, and interfere with the company's ability to take on larger projects and achieve growth and profitability.
Why is Cash Flow Important?
All healthy businesses need a steady flow of money to fund projects, make investments for growth, cover unexpected situations, and properly manage the business through any season of operations. Managing cash flow allows a company to predict business needs, identify potential problems and grow. Essentially, cash flow is the water, oxygen, and nutrients to sustain a healthy company.
How can I fix negative cash flow right now?
Finding yourself in a negative cash flow pinch is never pleasant, and you need to be prepared to do some hard things and have some hard conversations. Keep in mind there is no "one solution fits all" approach to correcting a negative cash flow situation, but there are some steps you can take to get back on the right track:
- Cut out all unnecessary operating expenses - take a hard look at your expense lines - are there subscriptions you can put on hold? Unnessential personnel you can temporarily lay off? Are there tasks you can do rather than outsourcing and paying for?
- Get paid! Follow up with clients for non-payment or slow payment. Be sure you are getting paid according to your contract terms. Don't be afraid to enlist a trustworthy collection agent for help. It's better to pay collection agent fees and get money in the bank than to have nothing or wait more days, weeks, or months for funds to come through.
- Consider a line of credit - I am not a fan of going into debt to get out of debt, but if you work with your bank, they can often work with your secured receivables to extend your credit.
How Can I Prevent Cash Flow Issues in the Future?
- Keep Good Records: Use accounting software or get help from an accountant to track what you earn and spend. This makes it easier to understand your finances.
- Plan Your Cash Flow: Estimate how much money you'll make and spend in the future. This helps you prepare for any times when you might not have enough cash.
- Send Invoices On Time: Make sure to bill your clients as soon as you finish a job and follow up if they haven't paid. This keeps the money coming in steadily.
- Reward Early Payments: Encourage clients to pay you early by giving them a discount. This speeds up your income and helps with cash flow.
- Watch Your Spending: Keep an eye on your expenses and look for ways to save money without sacrificing quality. Negotiate better deals with suppliers and find cheaper solutions for your needs.
- Save for Emergencies: Set aside some money from your earnings to cover unexpected expenses or slow periods. This gives you a safety net when things don't go as planned.
- Monitor Loan Payoff Schedules and Get Ahead of Debt: Keep track of when your loans need to be paid off and aim to pay them off early if possible. Reducing debt can free up more cash for your business and improve your financial health.
Effectively managing cash flow is essential for the success and sustainability of your contracting business. By implementing the strategies outlined above—keeping accurate records, planning cash flow, invoicing promptly, encouraging early payments, controlling expenses, building a cash reserve, and staying proactive in financial management—you can navigate through challenges and maintain a healthy financial position. Remember, proactive financial management is key to ensuring stability and growth in your business. Take some time to review your numbers and give your financials some love. A little attention and strategy goes a long way.
