Four Ways to Keep Cash Flow High During Busy Season

Posted on Monday, June 25, 2018

Everyone struggles to keep up when business really takes off. Projects come all at once. You may hire additional field workers to meet the demand. Payroll is stretched because payments which come in on your new projects lag months behind the large sums you lay out weekly to pay your workers.

This type of project financing concern is not yours alone. All construction contractors face this type of project financing snafu to some degree. The basic problem is your firm gets paid months after you need the money to run your projects.

There is something you can do to counteract the project financing snafu. The following are four great ways your firm can keep your bank balances high during busy season.

#1: Tighten Up Your Collections

You work very hard to gain new projects. You strive to keep your estimating department in shape to bid projects effectively. You coordinate your project managers, who oversee your existing jobs, to keep all your customers happy. As business picks up, you have every right to demand your customers also pick up the pace in paying you.

The "pay when paid" obstacle all of your customers will give you doesn't have to be an "all-or-nothing" answer. Good relationships with good customers over periods of time create synergies you can and should take advantage of. For example, good customers you can rely on will lay out money to your firm if necessary, out of their own bank accounts, just to keep your firm "moving brick."

There is a different tack for you to take with firms which are not giving you new work. Don't be shy about leaning on them a little more aggressively than your active customers so you can support your current cash needs. You've earned the money. Remember, your firm has established payment terms for a reason. Net 30 is Net 30. But no need to bring in the "big guns" like liens right away.

Before going to extremes, you can try to get retainage payouts on completed projects, get upfront or "startup" payments from some customers, and re-read your existing contracts to identify payment deadlines you may not have been aware of — but your customers may be bound by — to get access to cash.

#2: Control Costs

Have your accounting manager or controller justify his or her job by insuring all your firm's money has a high spend-to-earn ratio. A high spend-to-earn percentage means most of your purchasing and spending decisions are creating new revenues for your firm.

Spend-to-earn ratio = Cash spent during the period to make new money
____________________________________________________
Total cash that came in during the period

If you need help identifying the spending which will yield more revenues, contact your accounting or tax consultant. This will insure your firm continues to bring in the revenues it needs to support its cash flow requirements.

#3: Use A Debt Management Plan (or Make All Borrowing Strategic)

We all know what it's like to go to the bank to borrow money when we need funds. But that may not be a good time to borrow. If your firm needs money that badly, it's probably better to earn it at that time than to borrow it. Borrowing based on need works against your firm.

Primarily, it puts you at a disadvantage when negotiating the interest rates, the term of the loan, and other covenants which will be decided upon. In other words, borrowing based on need compels you to accept terms which are not so favorable — terms you would not otherwise have accepted — because you need the money.

Using a debt management plan means all borrowing must be strategic in both utilization and in payback. Strategic in utilization means the funds need to be used for a specialized purpose. So the funds are not only slated for a particular purpose, but also actually spent on what the borrowing was intended for. This purpose-driven borrowing avoids sloppy usage of working capital lines of credit, where keeping the balance high means paying a lot of interest.

Strategic payback of debt means using a structured payback period with regular payments of principal and interest. The alternative to strategic payback is paying the minimum on debt like credit cards, where interest accumulates over time and principal is not paid down at all. In either case, avoiding high interest cost is a good cash management strategy.

#4: Employ Strategic Tax Planning

Use a good financial reporting system to generate monthly income statements which are fully accrued and adjusted. This increases your view on profitability.

Talk with your accounting and tax advisors if you don't get a monthly income statement which is fully accrued and adjusted. These reports can be formulated for you at a reasonable cost. They can be run month after month at the click of a mouse.

Knowing your true profits year-to-date is the first step toward effective tax planning. Once you can see whether your firm is posting a year-to-date profit or loss, and you see the magnitude of that profit or loss, you may be able to carry back the loss to prior years and recoup a cash refund. Or you can write off some major deductions to offset the profits that would otherwise create current or future tax liabilities.

The way a good tax management strategy helps you conserve or increase cash on hand is by deferring current tax obligations to future periods or applying losses against current or prior years' tax obligations for cash refunds or credits.

Posted in Tax Topics For Individuals

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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