According to a Kabbage survey of construction firms, 28 percent cited cash flow as the biggest challenge during their first year in business, outweighing finding new customers. As your business grows, the struggle to manage a positive cash flow may continue. Towards the end of a project subcontractor fees, invoices, inspection fees and finish materials Read more
According to a Kabbage survey of construction firms, 28 percent cited cash flow as the biggest challenge during their first year in business, outweighing finding new customers. As your business grows, the struggle to manage a positive cash flow may continue.
Towards the end of a project subcontractor fees, invoices, inspection fees and finish materials are due all at once. If you front-load payments or don’t track outstanding bills, you may find yourself undercapitalized.
The good news is that there are practical steps you can take to structure your cash flow and stay ahead.
Align project cash flow with company cash flow.
Plan to pay your company’s quarterly taxes, marketing costs, insurance premiums and other predictable expenses when big bills for your project are not due. Additionally, if you invested in capital equipment, you may be able to claim depreciation and other write-offs to minimize quarterly tax payments and free up cash.
You can also work with your accountant or use tools to analyze your finances and make small adjustments to smooth out the peaks and valleys in your cash flow.
Break up your invoices.
Customers appreciate prompt, smaller bills because it helps them manage their own cash flow. John Montijo took several years of trial and error after starting his construction business in Staten Island, New York to figure out the best way to ease the burden on his business and his customers.
John realized that he didn’t have to follow the industry standard of billing in three or four large installments over the course of a job. Instead, he broke his invoices up further, billing after each stage of a job: for demolition, sheetrocking, windows, insulation, plumbing, electrical work and so on.
Instead of writing a check for $25,000 on a $100,000 job, John’s customers can pay $10,000 at a time, a cash flow win-win for both sides.
Have a cushion.
Dennis Moloney of Best Restorations in Delray, Florida, doesn’t like when his company’s cash flow gets tight.
This forces him to devise new budgeting strategies to stay ahead. Dennis takes advantage of early-payment discounts from his vendors to save money and utilizes lines of credit to bridge cash-flow gaps.
“In 14 years, I’ve never bounced a check or been overdrawn, and I want to keep it that way,” says Dennis. “I borrow to make sure I’m always looking good. “
Aditya Narula is the head of customer success at Kabbage, a FinTech company helping small businesses get access to working capital.