Businesses looking to guarantee profitability need to make positive cash flow one of their top goals. This advice is especially important for contractors.
While profit is one of the most important measures of your financial well-being, short-term gains may not answer immediate needs. Cash-flow concerns for individual projects can spur the need for financing thus affecting overall profitability. Therefore, as a contractor, you should aim either to maintain positive cash flow or to minimize negative cash flow from a single project. There are simple steps you can take from the onset of a job that will help you get paid faster and avoid delayed payments. In this article, we will address a few simple actions you can take to improve your cash flow.
Contract Billing Provisions
To improve your cash flow, you will want to start by factoring contract billing provisions into project preparation. You should consider incorporating contract requirements that increase cash flow in the beginning stages of a project so that you get a higher percentage of the contract price early. For instance, consider billing arrangements that call for payment upon the completion of stages of work or upon the delivery or installation of particular materials.
When setting the official schedule, avoid front-end loading and overbilling. These common practices have the potential to damage the client relationship and delay payment.
Cash-Flow Projection and Forecasting
Start by preparing a cash-flow projection. Because you must spend money while pulling money in from each project, treat major projects as individual profit centers and group smaller projects together. Forecasting cash-flow requires examining all project costs. To see the whole picture, involve the people who do the estimating, bidding, scheduling and project management.
By monitoring this projection regularly and updating it to reflect changes in individual projects, such as delays or change orders, you can predict profits while determining whether your cash flow is adequate to support day-to-day business operations. Once you have prepared your projections, you can use them to adjust the timing of future receipts and disbursements to maintain cash flow. You will then see if there is a need for additional infusions of cash or financing costs.
First Payment Application
A job that starts well generally ends well. The first billing cycle is the perfect opportunity to benchmark expectations for subsequent billings. The project manager should be mindful of how quickly the first payment is received. A delayed first payment can be a red flag because there are generally no extraneous items during the project outset that would affect payment. Should payment issues arise, the project manager should gracefully let the customer know what is and what is not an acceptable payment schedule.
Timely first payment is equally important to note because it kicks off the unofficial payment schedule. Future payments that deviate from this schedule can serve as a red flag for project managers.
Evaluate a client’s creditworthiness before signing a contract. There are many sources you can use to discretely research a client’s credit history including Dun & Bradstreet, credit bureaus and banks. Obtaining this information at the onset of a project is key as it can indicate any potential payment risks involved in the job. Don’t forget to reevaluate a client’s creditworthiness throughout the contract’s lifecycle to ensure you have a good handle on your client’s ability to pay.
Early planning with periodic review throughout the life of a contract can elicit good cash flow and consistent financial health. For more information on how you can maximize your cash flow, please contact your financial advisor.