Previously, we addressed a question posed by a number of contractors on message boards regarding the difference between profits and cash. Specifically, “my income statement shows $50,000 but I don’t have $50,000 in my bank account. Where did the money go?” I introduced you to the Statement of Cash Flows, the financial statement that answers this question. As promised, in this installment of the series we’ll look at some ways that cash flow can be improved.
Collect payment on completion of the work — I am surprised (and dismayed) at the number of contractors who still invoice their clients for service work they perform. This tip alone will have a significant impact on your cash flow. Even if you’re still charging on a time & material basis, you can collect payment when you’re finished performing the work. You can also communicate your expectation of payment at the time of service by mentioning it when the appointment is scheduled.
If you do end up invoicing your clients, make sure that you clearly communicate your payment terms with them. If your terms are “net 30” (payment due within 30 days of the invoice date), make sure that clients are meeting those terms. If you haven’t received payment by the 30th day, you should be on the phone with the client on day 31 to find out the payment’s status.
Accept credit and debit cards — It’s important to offer a number of payment options to your clients. You want to make it convenient for them to do business with you. Many people have moved away from cash and checks to debit and credit cards. Yes, you have to pay fees to credit card companies for the service. However, remember two points. First, you are getting your money faster. Secondly, to quote my dear friend and industry icon Frank Blau, “the customer pays for everything.” Our industry is no different than McDonald’s, Nike or any other business. The customers pay for everything. The cost of endorsement fees paid to LeBron James or Tiger Woods is included in every Big Mac or pair of Nike shoes you buy. The fees paid to the credit card companies are built into the cost of our services.
Offer a discount for early payment — My personal recommendation would be to only do this with commercial clients on larger projects that you regularly invoice. Offering a discount for payment within 10 days or by the 10th of the month may entice the client to pay earlier than they normally would. The discount percentage is up to you. The ones I’ve seen out there the most are 1%-2%. This is something that most of us are familiar with because many of our suppliers offer us similar discounts. They’re doing it for the same reason that we’d consider doing it.
Require down payments on larger jobs — This is something that is done in my family’s plumbing company. We require a 50% down payment at the time the proposal is accepted by the client. This is especially helpful for those jobs that have significant material costs. We all understand that the clock starts ticking towards the payment due date on bills we get from our suppliers when the material is picked up. The down payment allows us to pay for the materials in a timely fashion. The remaining 50% balance of the proposal price is due upon completion of the work. The down payment percentage you require is up to you. This is simply another way to improve your cash flow.
Negotiate payment terms with your suppliers — A common strategy for improving cash flow for a small business is to accelerate your receivables (cash inflows) and slow down your payments (cash outflows). Most of us have great relationships with our suppliers. I’m not suggesting that you pay your suppliers late. That’s not good for the relationship. Make sure that you make your payments to the suppliers by the date they’re due. If you have a strong relationship with a supplier, you may be able to negotiate more favorable terms with them. Typical payment terms for payables, like receivables, are “net 30” days. You may be able to negotiate longer terms (say “net 45” or “net 60” days) or better discounts for prompt payment with some suppliers. I’ve seen this work in the past as long as it’s been “win-win” (i.e., it’s been beneficial to both the contractor and the supplier).
Establish a business line of credit with your bank — It’s important to have a plan in place for when cash flow is especially tight. It’s important to note that the best time to establish or increase a business line of credit is when you need it the least (i.e., when your credit/cash flow is the strongest). Far too often, contractors approach their bankers when their credit situation is the worst. The company hasn’t been profitable in years and they’ve used up all the cash at their disposal. Banks will not lend nor increase a business credit line in these circumstances.
Getting a line of credit opened with your bank will give you access to cash (via the line of credit) to cover short-term shortfalls of cash. Note that I said “short-term.” If you are consistently using your line of credit or carrying a balance on it for a long time, then you’ve got a bigger cash flow problem. It could be cost-related, pricing-related or even credit-related. In these situations, I’d recommend consulting with a professional for some guidance.
Finally, the biggest tip on cash flow I can share with you is to monitor it more closely or, if you’re not doing it yet, start monitoring it today! Managing your cash flow on a monthly, weekly or daily basis will help you identify and plan for those times during the year when cash outflows exceed cash inflows (times where additional cash is needed). You do this by creating and using a cash flow budget. I strongly encourage you to create one if you have not done so in the past. If you need help, please contact me and I can help you with the process.
Following these recommendations should improve the flow of cash into and out of your business. Next time, we’ll take an in-depth look at the balance sheet of a contracting company.
Michael Bohinc is a Certified Public Accountant in Cleveland, Ohio, and the owner of Keeping Score Inc. He has served as the Chief Financial Officer of Norhio Plumbing Inc., his family’s plumbing company in Aurora, Ohio, since 1988. He also currently serves as the Interim Director for the Service Nation Alliance – Plumbing Group. An ardent Cleveland Indians fan, Mike can probably tell you how many hours are left until pitchers and catchers report to spring training. You may contact him via e-mail at [email protected]