In the business world, cash flow remains the lifeblood that keeps your operations running smoothly. Whether you're a start-up finding your feet or a seasoned business in the construction industry, managing and maintaining a steady cash flow can be challenging. But a few small changes can make a world of difference to your cash flow and overall revenue.
Your business needs cash. Cash keeps your company in operation and enables it to grow, so you should know how much your business needs to survive. Although many think the answer is linked solely to operating expenses, this isn't true.
No single factor determines how much cash every construction business needs to have on hand. Somewhere between 3-6 months of operating expenses is an excellent baseline to start from, but there's more to it than that.
If you are experiencing cash flow troubles, here are things you can do to manage your cash flow better.
1. Check your expenses
Now is the perfect time to review where your money is going and check which expenses can be minimized or eliminated. Re-evaluate your costs and decide which ones are essential and should stay and which ones can be trimmed down or cut altogether.
2. Negotiate your debt
Initiate a discussion with your lenders if interest only or deferred payments on outstanding debts are possible.
Request more flexible payment options
It never hurts to ask, especially if you've been transacting with your vendors for a long time and you've established a certain level of mutual trust and confidence. You can request more flexible payment options or longer payment terms.
Tap into available credit lines
Take advantage of available lines of credit and place the funds in interest-bearing accounts.
Assessing your cash flow is fundamental to better understanding your business's financial health.
Let's dive into some practical strategies you can implement to boost your cash flow.
Make invoicing a priority -get paid faster and aggressively follow up on invoices.
Receiving speedy payments is crucial to improving your cash flow. If you typically invoice your customers, consider offering them an incentive to pay earlier than the standard 30-day payment period. A small discount of 5% could encourage them to settle their bills within ten days.
Small businesses in the construction industry are at risk of having their clients not pay them on time—or at all. Being too passive in collecting unpaid invoices or reminding clients when payment is due will not help you collect the money you need to pay your bills.
Sending out reminders of due invoices can speed up getting you paid and encourage clients considering not paying you to reconsider. Reach out to clients if necessary to discuss payment options. Even a payment schedule is better than no payment at all.
Invoicing should be a regular part of your business day. Adopting a same-day or next-day invoicing practice can ensure you're on top of your receivables. Additionally, consider emailing invoices as a supplement to regular mail.
If you have customers who are habitually late, don't hesitate to remind them regularly about payments.
Use business credit cards.
Using business credit cards to pay suppliers or make purchases can also help manage cash flow. Most credit cards offer a grace period, sometimes up to 25 days, allowing you to settle the statement balance without incurring interest. Some even come with cash-back features.
Watch for scope creep.
Scope creep occurs when clients or stakeholders change a project's goals or deliverables. Almost all projects experience some form of scope creep, but too many changes to a project can severely impact your bottom line and hurt your cash flow.
Make sure the terms of your project are set out clearly, and let clients know that any changes to the project will result in additional fees. If clients attempt to change the project, you can remind them about the original agreement and the extra costs. If they insist on making the changes, you can charge the agreed-upon amount.
Invest in today's technology.
Investing in modern bookkeeping software or invoice management services can help streamline your receivables and expedite customer payments. While it may seem like an additional cost, this investment can offer tremendous cash flow benefits in the long run.
Many software solutions can help you understand your company's cash flow. They can help you build projections and get a real-time view of how your business is doing. This information can then be shared among company managers so everyone knows how the company is doing financially and where strategies need to be put in place or altered to get you back on track.
Additionally, invoicing and project management software can encourage faster, more manageable payment from clients and keep projects on budget. This will also improve your cash flow.
Consider delegating the financial tasks.
Many construction small business owners become self-employed because they have construction skills, not because they want to be businessmen. The financial aspects of a construction business are complex and take much time and planning. That can add demanding responsibility to the business owner.
Hiring someone to take care of the financial aspects of your business or even to advise you about the decisions you face can take the stress off you. That's precisely how we can help. Having someone on your side with the financial expertise and construction experience to assess your business, advise you about your cash flow, and help you secure funding. With the time and money you'll save, it will be worth it in the long run.
Final thoughts
Remember, cash flow is king in the business world. Assessing your cash flow is fundamental to better understanding your construction business' financial health. Implement these simple yet effective strategies to maintain a positive cash flow and drive your business toward success.
Need help with managing your cash flow? Get in touch with us now.
About The Author:
Sharie DeHart, QPA, co-founded Business Consulting And Accounting (Fast Easy Accounting) in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations. She offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
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