Tooltip TextHaving enough cash to pay all your bills is essential for a general contractor to survive. If you do not have enough cash on hand, you will have to borrow money or have an established line of credit, which may come with high interest rate payments and only adds to your expenses. If you cannot borrow money, you will be hard pressed to keep your business afloat.
Obviously, managing cash flow is an important element in how a contractor runs their business. It can even mean the difference between profit and loss and more importantly can be the single biggest reason a small company goes out of business.
Here are some steps you should follow to avoid cash flow problems.
Have a clear view of where ALL of your cash is going
Write out a list of your monthly expenses. Be sure you include all of them, including utilities bills, which can often be overlooked, and out-of-pocket expenses, such as gas and maintenance for your vehicles or equipment. For those that vary monthly such as material costs or other outside contractor expenses use an average based on percent of sales.
Estimate how much cash you will have coming in
Here, it is important that you be realistic because it is crucial to staying in business. Depending on how long you have been in business, the best starting point is to determine how much you have generated in sales over the past year or quarter and subtract your expenses over that same time period to estimate earnings. Break it down into a monthly amount and if applicable how it may change based on the busiest vs. slowest times of year. Realize that you must save some of what you earn over the most productive months of the year to compensate for slower times of the year while still being able to pay your bills or even pay yourself. Avoid the temptation to spend all your earnings as the money comes in. Bank most of your earnings in the busiest and what should be your most profitable times of year and make sure you can get through the slower times of year before you spend all your cash.
If you are starting out in business for yourself, try to be as realistic as you can when forecasting future sales. Remember it is always better to be conservative or underestimate and be surprised with extra cash when the work rolls in. As an example, you need contingencies for taking on a job that loses money or any major projects that may get delayed.
Balance outgoing and incoming cash
Armed with these figures, you can truly set up a plan for managing cash flow. You want to make sure that the amount that is coming in is at least enough to cover the amount that is going out and preferably more. If it is not, you are going to have to have cash in the bank, have a strong business history to be able to borrow money or balance your sales minus expenses regardless if it’s a slow or busy time of year.
Here are steps you can take to help you achieve your objectives.
Trim expenses
Go over your expenses to determine whether some can be dropped or reduced. Take a careful look at each bill and see whether you can trim it as much as possible, without, of course, settling for inferior services or products. Examples may include getting additional quotes for insurance, finding multiple vendors for materials, or evaluating which lead sources are your lowest cost.
Require payment up front
For many jobs, you will need to obtain the materials you require in advance of the job. By requiring payment up front — at least enough to cover your costs — you will not have to dig into your cash on hand to fund material or other purchases. Be sure to ask for at least enough to cover all your costs or establish a set amount, such as half or a third of the total cost up front.
Another reason to require advance payment is a backup in case the customer takes a long time to pay you for the remainder of the job. You will have cash to tide you over until you receive the final payment in full.
Invoice your clients immediately
Most customers will pay you only when you invoice them. The sooner you do so, the sooner you will be paid. It is therefore advisable to invoice the client immediately as a condition of scheduling the work for the total job and initial down payment (50% if feasible). You do not set a final schedule or start the work until you receive the initial down payment. This initial invoice will also indicate that final payment is due immediately upon the completion of the work.
Add late charges
On your invoices, warn customers that late payments will incur interest charges. Specify the annual interest rate. Doing so will help ensure you get your money on time.
Accept credit and debit cards
Most people these days do not pay by cash or even by check. Not only is a credit card payment convenient, it is also becoming a basic expectation. There can also be some perceived benefits to you in terms of waiting for checks to clear or handling too much cash.
Although you incur bank fees when accepting cards, the benefits of doing so may far outweigh the cost. The card payment will be in your bank within a day or two of receiving it and you will not face bounced checks or the possibility of miscounting actual cash. Both cash and checks also face the hazard of being lost or stolen.
Stick to the plan
Once you’ve done your homework and built out a game plan for managing cash flow all you need to do is stick with your established principles and you’ll find that your business will have a lot less headaches when it comes to managing your money. Of course, there are tools that will also assist you with many of these tasks like JobFLEX, our contractor invoicing software for Android devices. Check out a free trial to see how JobFLEX can help with your cash flow management by allowing you to add terms to your estimates and invoice immediately.
