12 Strategies to Improve Cash Flow

In light of yesterday's post referencing construction industry cash flow issues, it seemed timely to discuss various strategies to improve cash flow. Here are 12 strategies to improve cash flow:

1. CHANGE PAYMENT TERMS

Establish a payment schedule based on the project’s percentage of completion. Be sure to include clauses in contracts that require the client to meet readily identifiable milestones tied to the payment terms.

2. BILL AHEAD OF COSTS

Avoid using company funds or a line of credit to fund an entire project. One method used to accomplish this is to ensure that contracts are front loaded to receive higher payments earlier. This way the client is taking on more of the financial risk instead of the contractor.

3. GIVE A DISCOUNT FOR PAYING WITHIN 30 DAYS

Encourage clients to pay faster by offering an incentive. Make the percentage discount high enough to entice clients to take advantage of this opportunity to save money. Build the discount into the project fee to absorb the cost.

4. SEND INVOICES RIGHT AWAY

Sales and invoices are the lifeblood of a construction company. You can't get paid if you don't send invoices. Simple as that. Make sure that you stay on top of invoicing your customers. The quicker you send invoices out, the faster cash comes in. If your current invoicing process is tedious, consider software that automatically builds invoices off of the original quote.

5. CHARGE INTEREST ON LATE PAYMENTS

Charge a high enough rate to make clients pay attention. Avoid waiving interest charges unless it is absolutely necessary to maintain the relationship with the client.

6. ADD A PAYMENT FEATURE TO YOUR WEBSITE

Accepting online payments from customers for smaller jobs and change orders can help generate quick cash flow. The transaction fees for paying online may well be worth it to get access to that cash earlier.

7. CONSIDER LEASING OR FINANCING NEW EQUIPMENT

Cash and working capital are the lifeblood of a business. Leasing and/or financing conserves working capital and spreads the cost out over the years that the equipment is generating income.

8. PLAN FOR THE TIMELY DELIVERY OF MATERIALS

If materials are purchased too early, capital may be tied up and interest charges incurred on the excess inventory. Additional expenses may be incurred if materials are delivered too early and must be put into storage or if orders that are placed too late have to be expedited. Using a materials requirement and management system can help project managers meet purchasing requirements.

9. MANAGE PRODUCTIVITY

Controlling labor activity at job sites is a concern for contractors. Labor productivity can be measured as functional units per labor hour for each type of construction task. Specific tasks can be monitored using either higher-level or lower-level measures. Miles of highway paved per hour is an example of a higher-level measure and cubic yards of concrete placed per hour is a lower-level example. Individual activities are easier to monitor using lower-level measures, while higher-level measures may be better for comparing overall performance against industry standards.

10. TRACK PRODUCTIVITY TRENDS OVER TIME

Month-over-month and year-over-year production statistics should be analyzed, especially when labor and material costs are on the rise. Contractors should also benchmark their performance against industry standards to ensure that job costs are in alignment with the competition. Study regional and national data, as well as indices compiled by creditable sources on performance by craft, project size, type, location and other major project influences.

11. USE HOLD-BACK FUNDS TO YOUR ADVANTAGE

Many banks are now allowing hold-backs to be used to assist with financing needs. Review the available options and negotiate better terms.

12. DISCUSS LOAN COVENANTS

Avoid having an issue with banks if the terms of covenants on commercial loans cannot be met. Look to rectify the situation before it becomes a problem. Bankers are more likely to continue to work with contractors who present a viable plan and realistic solution. Taking action may help to avoid funding interruptions.