Contractors Need To Actively Manage Their Cash Flow: Here’s How.

Every business has a revenue cycle, and constant cash needs. But unlike my favorite restaurant that gets paid immediately after serving my usual order, spicy tortellini, your construction company might not get paid for 30, 60, or even 90 days after service is complete and the job is done. Supply costs, labor costs, mobilization costs—there are many issues specific to construction that all add up to a unique cash flow process. Understanding how to improve your cash flow, and how it differs from your profit, is crucial to managing your company and avoiding the problems that come with poor cash flow.

A contractor might reason, “If a job is profitable, isn’t that all that matters? Why be concerned about my cash flow cycle?” Because a failure to actively manage your cash flow will seriously negatively impact your growth potential. Consider the findings of the Levelset “2022 Construction Cash Flow & Payment Report”:

• While nearly two-thirds of businesses report profit margins greater than 10%, less than one-tenth of companies report being always paid on time for completed work.
• Companies most commonly offer payment terms of 30 days or less, but less than 40% of construction businesses report getting paid within 30 days on average.
• Explanations for slow payment vary, with half of subcontractors blaming the general contractor while 40% of general contractors blame the project owner’s financing.

Industry news source Construction Dive details the following most common cash flow issues:

• Cash is tied up in projects, used to pay for job-related bills and expenses.
• Customers are slow to pay invoices.
• The contractor submitted invoices that don’t cover the scope of the work.
• The contractor performed/paid for changes that have not yet been approved by the client; therefore, they remain unbilled.
• There are missed deadlines or other billing missteps due to a new client’s unfamiliar billing practices.
• There is an unexpected increase in operating liabilities like payroll taxes, union dues, insurance fees or other financial obligation.

While contractors tend to focus on the production side of their business, there are other considerations key to your financial success. Regardless of the size of your business, when cash flow isn’t prioritized, your business is vulnerable to unnecessary risks. Poor cash flow leaves you exposed to missing deadlines; vendors might not want to work with you due to payment issues; liens could be filed; and ultimately, your reputation is on the line. You can avoid such exposure by mastering your cash flow. Follow these tips to eliminate the struggle to move money around to meet your cash flow needs:

Be Active in the Process

You have more control over your cash flow than you might think; it’s a matter of knowing your numbers. Open conversations with your suppliers and vendors can go a long way to managing and accessing your money. Review your billing process as regularly as your work completion process. Identify areas where there are breakdowns and work to improve them.

Additionally, consider steps like converting to digital invoicing and payment solutions. By taking advantage of technology, you can streamline the entire process and get paid faster. When cash flow is more timely, you can spend more time on growth and leads, less covering bills and payments.

Train Your Team

Training is critical. Spending company resources to properly prepare your team to handle issues is a sure way to improve your operations. Every contractor does some training with their employees, focusing many times on performance and safety, but, are you training those on your team that help you control your company’s cash flow process?

It is critical that project managers and office staff understand your billing process. Training helps them understand their role in the process and the changes they can implement to help make your company more profitable. Do your project managers understand how the timing of cash receipts can reduce your interest expense? Does everyone understand that vendor discounts can provide for substantial savings for a contractor with strong cash flow? Too often, construction team members do not fully grasp all they can do to help make their company more profitable by improving cash flow.

Monitor Your Past-Due Accounts

While some shy away from pursuing late payments, it is simply good business to request payments you are owed. There is a distinct difference between being straightforward and being aggressive. Do you have a team member who is in charge of paying attention to your collections? Do you know how many days it typically takes your business to get paid? Sending friendly reminders to your clients who aren’t paying on time is an important part of a good business plan.

You might also consider being more flexible in how you accept payments. The more convenient payment options are for clients, the faster they can pay. If nothing seems to be working, sending a preliminary notice can sometimes be equally as effective as a mechanic’s lien at getting the property owner or contractor to make a payment.

Focus on Communication

Let me guess: You have communication issues between the field and the office. That is the case with every contractor we talk with. But a consistent, focused effort can improve communications in a reasonably short time period. These issues often come down to understanding the challenges that each side is facing and being empathetic about the causes of the problem, even inadvertent ones. Once your entire team is working together toward the goal of improving cash flow, everyone on the team will see where they can contribute to improvements.

Change Your Change Order Process

Easier said than done? Most contractors use change orders throughout their projects, which are, almost always, not finalized until the last parts of the job. Change orders are “interest free loans” to the project owners. A typical scenario involves a contractor performing these “extras” throughout the job, then waiting until the end to invoice them. Invoicing is followed by 30 to 60 days of negotiation over the amount of the invoice. Once the amount is agreed to, the contract owner takes another 60 days to pay the invoice. The result: a huge strain on the contractor’s cash flow.

The best contractors have a proven system in place to accelerate the cash flow cycle related to their invoices, including billing for the extras as they are completed, or even ordered. If you find yourself collecting change orders well after the job has wrapped up, you need to improve your process to improve your cash flow cycle and avoid being the one financing the work.

Get Creative With Your Bid Line Items and Terms

The most successful contractors know the “art of the bid.” On bids with multiple line items, consider increasing the value on items that will be performed early in the contract. Items like mobilization, when it is not limited, are where savvy bidders will increase their values to accelerate their cash flow early in the contract cycle. Focusing significant portions of your bid on line items that are likely to be paid first can make a dramatic difference in your cash flow. This strategy allows the contractor to use the owner’s money to help finance the job.

Some contractors feel like their hands are tied with contracts, but you need to question unfavorable contract terms and stay transparent about your business needs. This is all about protecting your business. Don’t leave anything unaddressed that you’re not comfortable with. If your clients don’t have to pay you until they “get around to it,” you’re creating a perfect opportunity for extensive delays or even missed payments.

The contract should specify the scope of the work, payment schedule, and legal repercussions of late payments. Remember that your lien rights are designed to protect you. For more than two centuries, the mechanic’s lien has been empowering materials suppliers, contractors, subcontractors, and other construction stakeholders with the most effective weapon they can wield against delinquent or non-paying clients. You want to get liens filed on anything that’s unpaid or late, but a more proactive move is to issue notices that ensure your lien rights are protected at all times as you get more work.

When you walk onto a construction site, there is an entire community of stakeholders on the job. You are under enough pressure without cash flow issues. Being more assertive in your cash flow approach can help save critical dollars on interest, grant you more purchasing power with suppliers and allow you to be available to take advantage of growth opportunities when they arise. No matter how talented you are, or how dedicated to your craft, if you haven’t dedicated the time to improve your cash flow, you’re not setting yourself up for success.

We hope these tips will help you on your journey toward growing your business soundly, profitably, and predictably. HBK Construction Soluitons is here to help. You can reach us at 330-758-8613, or contact me by email at mkapics@hbkcpa.com.