Though listening to trend reports and predictions from economists, policy makers and business gurus can be mesmerizing, the best way for contractors to actually plan for the future is to focus on producing a positive cash flow. Here is practical advice for heading into a new year.
Reality Check
These days, In so many ways, planning is harder than ever for contractors, making it especially wise to run the business with a laser-like focus on cash flow. Finance expert Gary Bartecki puts it this way:
Our economic situation is far from settled, requiring contractors to take steps to produce positive cash flow first and foremost. Start out with your Generally Accepted Accounting Principles (GAAP) internal statements and convert them to a cash flow statement, which should be reviewed as often as possible to stay ahead of the game. The next step is to run the operation on a FREE CASHFLOW basis, which will assist with making equipment purchase decisions, as well as provide results that will maximize the value of your company…..Budgets and net income are nice to have around, but do not provide proof of producing positive cash flow. You understand, of course, that you can “sell” yourself into bankruptcy, where you put yourself into a situation where you do not collect enough to cover your bill payments in a timely fashion. Planning for cash flow will keep you out of that situation.
Thinking forward requires contractors to take a realistic approach to inflation. Relatedly, Bartecki shares these additional insights:
Inflation forces prices for goods and services higher. During the past couple of years, prices have gotten quite a bit higher. Getting the inflation rate down to 2% does not necessarily mean prices go back to what they were pre-pandemic. They will stay where they are at and “normalize” at this new, higher priced standard of living. This, of course, means your cash flow budget needs to use these higher prices for costing out your work … .OEMs and other sellers of goods and services like the higher prices they have been getting and are reluctant to reduce prices until they absolutely need to. Those prices will not come down until market conditions force them to do so.
Among the hardest decisions contractors consistently face is identifying the right equipment at the right price and deciding whether to rent or buy. In uncertain economic times making the right choices has become even more stressful. Advice is available here, and on the go forward, when plotting out equipment needs, be sure to preserve solid cash flow by “avoiding debts and fixed obligations,” noting this expert intel:
Keep in mind that the banks are not out of the woods yet and it is getting harder to obtain loans at a “reasonable rate”…. It is in your best interest to defer additional debt and fixed cost obligations at this time…..International Monetary Fund’s Assessing Reserve Adequacy (ARA) metrics indicates that the Penetration Index is heading upward close to 60%, which means that of the equipment in the field in the U.S., 60% of it is rented and scheduled to climb even higher….Rental companies are bearing both the cost to own and operate the units that make up the 60% ratio. They have the monthly nut to cover, and the user only pays when they use it. And at 9% interest rates or so, along with an unsteady economic forecast, contractors really want to stay away from any new fixed-cost obligations. Doing so will make your bankers happy.
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Word To The Wise: Daily Practice
Contractors who focus on routine, daily practices find that adherence to the basics does wonders for keeping the cash flowing in. For example, Bartecki stresses that on a weekly basis, management should be readily able to estimate cash receipts and payroll, as well as fixed and other payments. Done consistently, these calculations will help you “stay ahead of the game should you start running short of cash.” Improved focus on quickly converting short-term assets into cash also contributes to success: “Accounts receivable, notes receivable, work-in-process (WIP) and any hard assets sales all convert to cash receipts….The WIP…has to be converted to an invoice as soon as possible….Every day you gain converting WIP to cash makes a big difference.” More cash flow tips to help you lead your business forward are right here. Don’t forget: The Partnership Account® for Contractors also assists contractors to lead forward a competitive edge. Position your company to bid more and win more today:
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