Cash is king…and managing cash flow is the ace-in-the-hole for being able to meet payroll, pay bills, and report the financial health of a business. This is especially important during an unpredictable economy, when high or fluctuating interest rates and inflation have an influence.
Here are some ways to improve cash flow:
Ensure efficient collections: Strong cash management starts with collecting receivables as quickly and efficiently as possible. Make it easy for customers to pay by offering as many payment options as possible, including electronic, and be sure to send out invoices on a timely basis.
Track job progress: Make sure you have a good accounting system in place to track the progress of contracts and projects so invoices are sent at the appropriate benchmarks. If invoices are sent too late, costs might exceed billings, which could lead to an accounting imbalance and eventually a cash flow crunch. Don’t divert this cash for any other use or it won’t be there when you need to cover job costs.
Take advantage of payment terms: If a vendor offers 30-day payment terms, there’s no reason to pay in anything less than 30 days. This is essentially free supplier financing so take full advantage of it.
Offer prompt-pay discounts: On the flip side, it might make sense to offer customers a small discount for paying their invoices early, which will help boost your cash flow. With a 2/10, net-30 discount, for example, customers would receive a 2 percent discount for paying invoices in 10 days instead of 30 days.
Budget for retainages: If a customer, such as in a contracting job, is holding back five or 10 percent for retainage, be sure to factor this into your cash flow projections and anticipate a potential cash flow shortfall. Establish a line of credit with your bank to carry you over should this occur.
Stay on top of change orders: These can accumulate over the course of a project and can add up to a tidy sum. Make sure you have a system in place to track change orders and get paid for them.
Finance capital expenditures: Some businesses use cash on hand to pay for equipment and other big-ticket items. Capital expenditures like these could be financed instead, either with a bank loan or equipment lease. Leasing is more advantageous from a cash flow standpoint; perform a lease-buy analysis to see which option is best for you.
Build-in price-adjustments: While inflation has subsided in recent months, material prices are still rising in many areas of the country. Consider adding clauses to your contracts that automatically increase prices to account for inflation. Also consider purchasing and stockpiling certain materials at today’s prices if you know you will use them in the future.
The professionals at Dembo Jones can work with you to explore tools for managing your cash flow and maintaining a healthy cash position. Let us know how we can help.