Cash Is King. I am sure you have heard that saying before. But in business it is very true. Understanding the sources and uses of cash can help any business ensure that cash is available to buy necessary equipment, hire personnel and cover operational start up expenses just to name a few examples. The following post will give a number of tips that can be used to understand and manage cash flow in order to maintain strong working capital for future project.
1. Understand What Drives Your Cash Flow - Reviewing balance sheets and income statements are very important but reviewing and understanding your cash flow report will help your construction business better understand the sources and uses of cash during specific time periods. This will help in better understanding how your cash flow is being used and whether your construction business is building or draining cash.
2. Actively Management Cash Payments - Take advantage of discounted payment terms if cash flow allows. 2% discounts if paid in 10 days can reap serious cash flow rewards over a one year period. If cash flow is tight, consider bartering for services or delaying payments as long as the payments are within terms. Use of credit cards is an option but must be done with caution as failure to pay the credit card bills timely will continue to drain cash flow.
3. Manage Monthly Expenses - Review recurring expenses to ensure they are needed or can be reduced. Manage peaks in workload through the use of LEAN office services, outsourcing or using temps. Consider changes in lease agreements for vehicles and equipment and review regularly monthly service plans on cell phones, internet, etc.
4. Have Other Sources of Financing Available - In the event that cash on hand does not cover investment needs for equipment, etc., ensure that other sources of financing are available to help with short term cash flow needs. Other sources of financing could be lines of credit with financial institutions or ready ability to borrow with other lending facilities.
5. Collect Receivables Timely - Ensure that clients stay within payment terms will ensure that you are not financing their project. Offer discounts where necessary to collect cash faster. Ask for partial payments up front or larger initial payments on projects. Offer different payment options such as credit cards. There is no risk to you of the customer overdrawing their account or delay caused by mail service from checks.
6. Review Collection Process - Look for ways to better improve the collection process. Understand customer perferences for billing. Can the bill be emailed versus mailed? Is all contact information for the customer up to date to ensure timely receipt of the bill. Ensure that all required information per the customer is on the bill to eliminate confusion and delay on payment.
7. When Necessary, Send Late Receivables to Collection - Don't wait until it is to late on delinquent receivables to collect, use a reputable collection agency to step in an collect receivables when they meet the credit term limits. This will let customers know that late payment is not acceptable.
Using these tips to better manage cash flow will help improve working capital within your construction company. To learn more about this post, please contact the construction professionals of McKonly and Asbury, LLP.