Of course every contractor wants to avoid cash shortages–and the time and effort wasted while fumbling through them. Financial experts point to the importance of strong and steady daily processes that keep the cash flowing in. Here is practical guidance.
More Is Better
While not necessarily always true in life, when it comes to operating a contractor business, more cash is certainly better. To that end, Gary 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, having these calculations at the ready should help you “stay ahead of the game should you start running short of cash.” Bartecki also points out that improved focus on quickly converting short-term assets into cash can make a world of difference:
How long that takes is the issue. 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. And I mean ASAP! The cost accounting needs to be current. All waivers received and reviewed against invoices being billed. Any cost or billing issues resolved before the invoice is prepared or removed from the current invoice if finalizing open items will take too long to resolve. The invoice has to be problem free with all required back-up so that you can get an anticipated payment date. Every day you gain converting WIP to cash makes a big difference. And when you get a check, it MUST be deposited that day. It does you no good to speed up the billing by a week if you let the check sit on your desk for three days.
When looking at how to better convert assets to cash, don’t forget equipment. Under-utilized equipment is a notorious and major drain in the building business, as Pros remind us:
If you do not use the equipment any longer nor have a need for parts sitting in part bins, get rid of them and convert those assets to cash. No matter what you get for them, it is a plus if the equipment or parts in question are otherwise just taking up space. If you have enough old stuff to sell, you may be able to reduce your line of credit with sales proceeds and lower your interest cost in the process.
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Good To Do: Homework
Making a commitment to regularly understand and maximize your cash position propels success.Toward game change, Bartecki suggests this homework for contractors:
● Cash needs to be on a worksheet by week including dates when payments are due.
● Cash needs to be prioritized so you make the right payments at the right time.
● Review the billing process to see if you can speed up invoices by a week or two.
● Be told what checks or payments came in that day and whether they have been deposited.
● Actively chase your money.
● Immediately resolve any billing issues.
● Track days it takes to collect ( 30-40 day range)
● Calculate days sales outstanding and review monthly.
● Assign responsibility for these tasks.
● Remember, CASH IS KING, but more cash is better.
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