Written by Steven Uster, Co-Founder & CEO of FundThrough
Life as a contractor in the Muskokas brings its own unique set of challenges. From construction and its sub-trades (electrical, plumbing, heating/cooling, excavation, etc.), to fishing charters and everything in between, you need to fill every available hour of your time during the peak season. You also know that you need free cash flow to buy the supplies and materials you need, hire subcontractors and rent equipment.
A recent TSheets by QuickBooks survey found that 87% of construction companies experience cash flow problems, and of those, 47.4% experience negative cash flow monthly to quarterly. For 18.6% of these companies, cash flow is a constant problem. In order to make the most of the season, you need to maximize your workload without turning anyone away, and that takes free cash flow. Here are a few ways you can achieve this and make the most of the high season.
1. Use electronic payments to make more frequent milestones painless.
Begin by establishing payment milestones in your contracts. Many contractors ask for a 50% down payment, but you likely already know how quickly that deposit can disappear once you start paying for materials and labour. This is especially true for those larger and more lucrative jobs that require a lot of expensive materials. You may find that you are paying for the necessary supplies and labour out of your own pocket while waiting for the final payment.
Establishing payment milestones in 25% increments will ensure a steady and continued cash flow as the job progresses. Aim to have 75% collected by the time the bulk of the work is done, and the remaining 25% can be collected after any final approvals. Your customers will be satisfied and confident that they still have assurances of completion, and you will have the cash you need to keep the job on track! Using electronic invoicing and accepting direct deposit or credit card payments can make payment seamless for customers—so much so that they won’t mind the increased frequency.
2. Use cash flow forecasting to increase capacity.
You already run a budget to track how much cash you have to spend, but cash flow forecasting will tell you if you have the ability to pay specific expenses at the prescribed time. It shows you in advance if you are going to run into a negative cash flow, so you can put your cash flow management strategies into action to bridge the gap. Do your cash flow forecasting weekly, and you will have the time and forewarning to avoid getting caught short of cash, be able to maintain a positive relationship with suppliers, and meet your payroll.
You can download this free cash flow forecasting spreadsheet and get started today. If you’re looking for a more powerful tool, check out a tool like Float, which integrates with QuickBooks and takes a lot of the legwork out of making those projections..
3. Speed up your accounts receivables cycle.
One of the most common challenges in small business is getting paid on time by your clients, and this is particularly troublesome for contractors. You need to pay your suppliers and workers on time, in order to get the job done on schedule.
But in construction and its sub-trades, payment terms can vary greatly depending on who your client is. You may be able to get residential customers to agree to more frequent milestones with electronic payments, but what about government agencies? Larger developers may also be rooted in the traditional way of doing business and refuse to negotiate on terms.
You can get ahead of this vicious cycle by having a toolkit of cash flow management strategies at the ready.
If you qualify for a small business credit card, use it judiciously and always make the minimum payment. Credit card companies often include clauses that a single missed payment will result in the cancellation of the introductory or promotional interest rate that sold you on the card in the first place. Suddenly, you could be paying 19% instead of 1.5%, for example.
And of course, every contractor should have a line of credit at their disposal. The trouble is that if you’re already experiencing cash flow issues, banks are less likely to approve one. If they do, it may need to be secured against your shop or home.
This is why invoice factoring is seeing a revival. It allows you to put money you’ve already earned to work for you right away by advancing 100% of the invoice directly to your bank account at your request. You can offer your clients payment terms that meet their needs without slowing your cash flow to a crawl, and the cost of using a service like this is low thanks to the technology now used to facilitate it. My company, FundThrough, integrates directly with your invoicing software and bank, so all of that overhead and the massive fees invoice factors used to charge has been eliminated. You have 12 weeks to repay each invoice you advance and can repay early to reduce the factoring fee.
As your cash flow increases with the ease and security of invoice factoring, so too does your ability to take on more work in the high season. As your business grows and new invoices are created, your available funding grows with it.
Peak season in the Muskokas is short, and you want to make the most of it. You’re busy enough already without lying awake at night, worried that you don’t have enough cash flow to finish a job, get the next one started, or pay your hard-working employees. Establish payment milestones, use cash flow forecasting religiously, speed up your payment cycle, and you’ll have the skills, confidence, and funding you need to make it your most profitable season yet!
Steven Uster is the Co-Founder & CEO of FundThrough, an online factoring and invoice funding platform that enables users to turn their invoices into next-day working capital.