In all industries, cash flow is important. Without a regular influx of cash, it can be hard to take care of essential parts of your operations, like paying employees, fulfilling purchase orders, paying subcontractors, and managing payables and receivables. Cash can be a sticking point for many, and can create big debt issues that can be hard to come back from when not managed properly. Whether you know it or not, cash on hand can be your best friend in business.
As a contractor, you likely don’t have much time to tackle the accounting side of your business since you are likely focusing on project management, but a thorough understanding of cash flows can make a big difference. Here’s why cash matters.
Even if finances aren’t really your specialty, the ability to forecast earnings is a key aspect of operating a successful business. Without comprehensive knowledge of what’s going in and what’s going out, it can be extremely hard to anticipate your overall income for any given period of time, including throughout the duration of a project. If you’re not sure when cash is coming in, you’ll struggle to budget for the future with any certainty. Everything from fees and interest on loans to project timelines can be affected by your understanding of cash flows, so failing to keep tabs on payments can cost you more than you realize.
A good contractor never goes into a job blind. If you have a big project coming up, the best way to stay on track and on budget is to plan your business around your cash flows. Say, for example, you have a construction project on the horizon. Instead of showing up with a team project and seeing how things play out, you’ll want to plan your progress down to the day to ensure you maximize earnings and net as much money as possible. Comprehension of cash flows can help here, allowing you to base billing schedules on anticipated needs, average turnaround times, potential cost escalations, and more.
It is critical on the front end of the job to make sure billing deadlines are met and in the proper hands to start the payment cycle. Depending on the type of project and funding source, payment could take anywhere from 10 days to 90 days to receive payment. Knowing this at the beginning of the job will help you anticipate cash flow needs and help you determine when you are paying suppliers and Subcontractors. The more you know, the better you can prepare, ensuring every obligation is covered with ease.
Do you have enough cash to rent equipment today, or will your spending jeopardize your rent payment next week? If you pay your team this Friday, will you have to slow progress on your project spending to keep bank accounts in the black? These kinds of questions should be easily answerable, but a lack of knowledge is how many contractors get into hot water. Assuming there’s enough cash and knowing there’s enough cash are often two different things. Making payments in haste can lead to big interest charges, work delays, and payroll errors, slowing down your momentum with easily avoidable problems. With a solid grasp on job progress and cash flows, however, you can keep projects moving forward with confidence.
Understanding cash flow can be a challenge but it is essential in keeping your projects and business running smoothly. Professional assistance from Klein Hall CPAs can help you make the most of your business, letting experts handle your cash flow management while you focus on what you do best. Get in touch today to learn more!