When you run a contracting business, you’ll quickly learn that cash is king. Without the money to keep the lights on and the bills paid, you wouldn’t have much of a business. But it can be tricky to get your income and expenses into a balance you can manage every month. Here are a few ways you can tell that your cash flow strategy needs an overhaul.
Mismatched Income and Expenses
It’s not uncommon for contractors to pay for the majority of the expenses for a project before they receive payment from a client. At times, this may be the only way that you can keep projects going. On the other hand, if you are regularly waiting much longer for payment than you have to pay your bills, you may have a cash flow problem. For example, if your suppliers bill within 30 days and you have to wait 60 days for payment, you may have as much as a month waiting to refill your account. For contractors who work on shorter projects, this can create a significant backlog. Extra money in savings can help, but it is not always enough.
Using Credit for Cash Flow
Credit can be an excellent tool to use to help cover minor shortfalls on occasion. However, when contractors begin to rely on credit as a way to fund every project, they may start to run out of options. After all, you can only use credit so much until you run out of money. On top of that, the more debt you have, the more you have to pay in interest and regular payments. As a general rule, experts recommend the contractors try to minimize the amount that they spend on credit for projects, particularly if they are waiting for a payment at an undetermined point in the future.
Trouble Getting New Credit
When you’re using credit for cash flow, the cycle of debt can begin to create other problems for you. For example, you might use a line of credit as a way to get supplies for your projects. Once that line of credit runs out, you may think that you can request an extension or get more credit elsewhere. Of course, this depends on a variety of factors, and you may not have an attractive borrowing record yet. If you find that you’re constantly running up against your credit limits and looking for options to add more debt to buy you more time, you may need to rethink your cash flow.
Regularly Declined Purchases
If your cash flow situation becomes serious enough, you may find it difficult to get the supplies that you need or equipment rentals. It’s not uncommon to negotiate an arrangement with your supplier where you buy materials on credit and then pay them back once you have received payment on your invoices. But if your clients aren’t getting back to you on time, your suppliers may decide that it’s too big of a risk. If you have a flexible line of credit, but you’re finding that you can’t use it, you may need to think differently about the way that you are utilizing credit in general to assist with your cash flow.
Paying Yourself Later
When you have more bills than you have income to pay them, one of the first places that you may look to trim back is your own paycheck. If you have employees, you’re required to pay them. But it’s tempting, in the midst of a cash flow problem, to think that you’ll pay yourself at the end of the next project and catch up. The problem is that over time, you can build a backlog of income that you’re not taking. And eventually, you won’t be able to keep doing work if you’re not getting paid for it. It’s better to think about ways that you can re-order your expenses to work with your projects, or incentivize clients to pay more promptly.
Learning how to analyze and manage your cash flow is one of the most important things you will do as a contracting business owner. To learn more about becoming a licensed contractor, visit CSLS today!