Cash flow can make or break a business for contractors – no matter how big or small your company is. You can report high sales and show large profits on your Income Statement, but unless you are bringing in more cash than you are paying out you will quickly find yourself struggling to keep your business moving forward. This is why you hear the phrase “Cash Is King!” used by many smart business people.
Even if your cash flow is good right now, you can still use the below tips to make it even better and ensure you don’t end up in a situation where you are in a cash crunch.
Tip #1: Have a plan!
Track actual receipts and payments and have a forecast for the future. Use excel, write it on a piece of paper – whatever. Just write it down and review it each week. By tracking finances regularly, you can quickly adjust your strategy so your bank account doesn’t go into a negative position. In the below example, this owner could easily see that he was going to be $60 short as of Jan 29th and as such could’ve cut down on travel to ensure he didn’t go negative:
Tip #2: Influence Cash Inflow
- Invoice customers upfront and/or frequently. Example: Instead of billing quarterly after the work is complete, bill monthly and in advance.
- Require a deposit or prepayment from customers.
- Extend a payment option that gives a discount if a client pays quickly. Example: If the client pays within 20 days then they get a 2% discount.
- Offer a 10-20% discount to a client who is severely past due if they agree to immediately pay the balance in full.
- Factor receivables, which is a process where you sell your receivables to another company and they collect the money from your customers (for a fee of course).
- Establish a line of credit with your bank so you have funds available to you if, and when, you run into cash flow issues.
- Factor in seasonality of your business. Example: many contractors see a slow down in business each winter. Make sure your cash forecast reflects the decrease in receipts, so you know how much money you have to spend in the down months.
Tip #3: Control Cash Outflow
- Negotiate payment terms with your vendors. The most common terms are “net 30,” which allow you to pay the invoice 30 days from the invoice date. See if you can get your vendors to agree to “net 45” or “net 60.”
- Discuss possible discounts for paying early. Can you pay $900 to settle your $1,000 invoice if you pay in 20 days?
- Ask your vendor for a payment plan if all else fails. Most vendors will work with you rather than shut you down and lose the business altogether.
- Use credit cards to make purchases. Doing so, allows you an automatic additional 30 days to pay for the charges with cash.
- Cut costs. Variable and non-essential costs, such as travel and office supplies, can be reduced until cash flow is under control.
Predicting cash flow is an important part of managing a growing business. You might find it intimidating at first, but it does gets easier with time. Start with the basics. Have a plan, keep an eye on the numbers, and try the tips outlined above. Make sure cash is king at your business to continue moving towards your financial goals.