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Top Strategies to Improve Cash Flow for Service Contractors
As obvious as it sounds, money is the life force of any business. Without a steady cash flow, everything becomes more difficult. When margins are tight and available funds are scarce, one late payment can create a ripple effect that upends numerous projects. Unfortunately, you can’t pay most creditors or suppliers with promises of upcoming projects, no matter how many you have lined up.
We all know how stressful things can get when cash flow is slow and invoices are piling up. Here are a few strategies we have found to be effective for improving your cash flow and making things run a little smoother for your business.
Cash flow is the amount of money and cash equivalents that flow in and out of a business in a given period of time. This is the money in circulation internally that ultimately is used to cover costs, pay out payroll, and cover invoices from suppliers.
What is cash flow and what impact does it have?
However, the relationship of inputs and outputs that define cash flow can be tricky to balance, as contractors often have to pay suppliers well before their customers pay for a project. When you’re paying out more than you’re taking in, that puts you in negative cash flow – a very challenging state to be in.
For businesses of all sizes, maintaining a positive cash flow presents hurdles, especially during periods of economic uncertainty. It’s vitally important though – slow payments can have big impacts:
Delayed projects — When a delayed payment affects your ability to order supplies or materials up front or cover payroll, your new projects can’t get started on time. One delay can cause a chain reaction that pushes several upcoming jobs back.
Slowed business growth — Many businesses turn to short- or long-term cash infusions from lenders to cover funding gaps and stay on schedule. Getting a loan or line of credit to cover negative cash flow is sometimes a good idea depending on the circumstances, but in most cases, it will just increase costs through service charges, fees, and interest that slow down your ability to invest in your company over time.
High employee turnover — Late or missing payments can result in high turnover, brain drain, and overall lower productivity (it’s very hard to stay motivated when you aren’t getting paid on time). When turnover increases, hiring and onboarding new employees becomes a cost that soaks up even more time and money.
How do you improve cash flow?
When you generate consistent revenue, improving cash flow is more about finding opportunities than simple budgeting. Here’s how to get started:
Set goals for outstanding day sales and bottom line — Establish a benchmark for the expected turnaround time on the invoices you submit, and set a goal based on it to guide your efforts. Usually, it takes around 1 to 2 weeks to receive payment for a job. As you explore different opportunities to streamline payments, you can use this goal as your target to track results and build strategies.
Plan for overlap — Choose and sequence jobs with cash flow in mind by planning the right amount of overlap so your crews are not overcommitted, but you’re getting paid on earlier jobs in time to pay invoices on the next ones.
Regularly check your cash flow analytics — Once you have goals set, check your balance sheet regularly to ensure that your team is staying on track. Figure out your financial ratios so you know what to look for, and identify patterns that telegraph future problems before they become detrimental. Keep a close eye on outstanding day sales, accounts receivable turnover, working capital, and debt to equity in particular. Understanding cash flow analytics can also help guide other business decisions, like how much you should charge for labor as a contractor.
Employ automation when possible — Automation can not only take the tedious tasks like invoicing and follow ups off of your plate, but it can also ensure it’s done reliably. Many contractors stick with manual invoicing and estimation because they assume that technology solutions will prove more expensive than the ROI they generate… However, that is no longer the case for most businesses.
Estimation or CRM software can help establish these automations and keep them running while you spend your time on other projects or tasks. That way, you can allocate more resources to profit-generating activities, and free up your front office to improve customer service.
Create more accurate estimates — Finding the right price for a project is notoriously difficult. With all of the variables that go into creating accurate estimates – labor hours, supplies, surprise expenses – there’s usually one or two people in a company who can do it competently. Many seasoned project managers simply don’t know how to quote jobs reliably.
Accurate estimates are immensely important for generating positive cash flow and maintaining it over a number of consecutive jobs. The more “off” you are on your estimate, the less money you’ll take home at the end of the project, and the less you have to fund your next one. Building solid estimates can be especially challenging when done by hand without data to back up claims.
Use data to learn from experience — There’s no one failsafe rubric for how to get contractor pricing right for every project. Different variables will impact the timeline and costs associated with each job, and using experience is the only way to be sure you’re learning from any mistakes you make along the way.
Fortunately, using historical data can help you create more accurate estimates. Track your job cost for every project so, in the future, you can align with similar projects you’ve done before. Document your costs and regularly check them against the estimate – if you can pinpoint signs that costs will run over the estimate early, you may be able to get a change order or at least communicate the issue sooner.
Luckily, you don’t have to do all this number-crunching by hand: Estimating software can help keep track of all your historical data in one place and provide templates for you to use.
Process charge orders quickly — Charge orders should be processed quickly, rather than waiting for a project to finish. The quicker your project manager can send it off and receive payment, the better off cash flow will be.
Invoice promptly — Invoicing electronically can help speed up the payment process by avoiding mailing delays. Be sure to include all the terms on every invoice, not just the contract or first invoice. Your invoice should also include the due date of the amount owed, payment plan options, and the payment methods accepted.
One powerful way to avoid delayed invoices is to use invoicing software. This technology can also send out automated reminders and track unpaid invoices, taking the heat off your back office team.
Enable electronic payment — Create easy ways for clients to pay and they’re more likely to pay in a timely manner. Allowing for multiple types of payment, including online payment, translates to less time spent waiting for checks to arrive in your mailbox. With more payment options, customers can choose an option that works for them. Electronic payment enablement can also increase visibility into turnaround time for invoices.
Improve your cash flow with estimation software
When your cash flow is limited, small improvements can go a long way. You don’t have to make a 180° change today in order to improve the way your payments are received. Setting goals and sticking to them starts a chain reaction that makes exploring new ways to generate cash flow possible.
You don’t have to go at it alone either. Estimate Rocket can help you get set up for success using automation and electronic options to help your business grow sustainably.
Start generating consistent cash flows for your construction business.