According to a Kabbage survey of construction firms, 28% cited cash flow as the biggest challenge during their first year in business, outweighing finding new customers. As your business grows, the struggle to manage a positive cash flow may continue.
Cash-flow gaps can affect your ability to pay bills, order inventory, pay employees and just keep your company in business. There are many reasons your business may face cash-flow gaps, including seasonal fluctuations, too much inventory, late payments from clients, overpaid vendors or constant equipment maintenance issues. When profits are absorbed by these challenges, cash flow dries up.
Towards the end of a project, subcontractor fees, invoices, inspection fees and finish materials are due all at once. If you front-load payments or don’t track outstanding bills, you may find yourself undercapitalized.
The good news is that there are practical steps you can take to structure your cash flow and stay one step ahead of these common challenges.
1. Align project cash flow with company cash flow.
With so many components of a project moving simultaneously, it’s important to make sure you have all the moving pieces of your business in check, too. Plan to pay your company’s predictable expenses, like quarterly taxes, marketing costs and insurance premiums, when big bills for your project are not due. Additionally, if you invested in capital equipment, you may be able to claim depreciation and other write-offs to minimize quarterly tax payments and free up cash.
You can also work with your accountant or use tools to analyze your finances and make small adjustments to smooth out the peaks and valleys in your cash flow. An easy place to start is taking advantage of upfront payment discounts and making sure you have access to funding for those inevitable unexpected costs.
When you have a detailed budget for the year, you will have a clearer picture of how each project can best contribute to your company’s healthy cash flow.
2. Break up your invoices.
A longer cash-flow cycle can hurt your cash flow. By buying smaller increments of inventory, hiring staff during busy seasons or requiring payments for orders up front, you can improve your cycle. Another way to shorten your cash-flow cycle while also improving your customers’ experience is to break up your invoices.
Customers appreciate prompt, smaller bills because it helps them manage their own cash flow. John Montijo took several years of trial and error after starting his construction business in Staten Island, New York, to figure out the best way to ease the burden on his business and his customers.
Montijo realized that he didn’t have to follow the industry standard of billing in three or four large installments over the course of a job. Instead, he broke his invoices up further, billing after each stage of a job: for demolition, sheetrocking, windows, insulation, plumbing, electrical work and so on.
Instead of writing a check for $25,000 on a $100,000 job, Montijo’s customers can pay $10,000 at a time—a cash flow win-win for both sides.
3. Have a cushion.
You may have an unexpected, last-minute expense and have to use less than ideal options, like dipping into your personal savings, to bridge a cash flow gap for your business. And you don’t ever want to be in a position where you have to use your last resort.
There are several options for getting extra funds. Depending on your needs, you may choose an SBA loan, alternate lending, a commercial loan, peer-to-peer lending, a line of credit or asset-based financing.
With so many options, it’s important to know the pros and cons of each. SBA loans and bank loans tend to feature cheaper and more generous loans, but underwriting requirements can be strict. It can take a long time to process a traditional loan. Online lenders are faster and easier than bank loans –though they may come with higher rates.
Do your due diligence to figure out what funding solution is right for your business.
Dennis Moloney of Best Restorations in Delray, Florida, doesn’t like when his company’s cash flow gets tight. It’s important to Moloney to make sure he has immediate access to working capital at all times because he never knows when he may have a great opportunity to take on a big project.
“That’s a big deal because sometimes, we don’t get paid until a job is done. It can stretch out for 4-5 months and we end up waiting a long time,” said Moloney.
This forces him to devise new budgeting strategies to stay ahead. Moloney takes advantage of early-payment discounts from his vendors to save money and utilizes lines of credit to bridge cash-flow gaps.
“In 14 years, I’ve never bounced a check or been overdrawn, and I want to keep it that way. I borrow to make sure I’m always looking good,” Moloney said.
Source: Construction Business Owner