8 ways Contractors can Maximize Cash flow

They don’t say cash is king for no good reason.

Being profitable and having cash in the bank are two very different things. You can be profitable and have no cash, and the opposite is also true (although quite rare!) As a contractor, you have to be aware of your cash flow in order to be able to pay your employees, your suppliers, your subcontractors, your rent and if there’s anything left, yourself! Here are some tips that can help you focus your attention and create some awareness in areas of your business that may be bottlenecking your cash.

Negotiate favorable terms prior to contract signing

I like to think of having equal business stature with my clients. They need a service that you are great at providing and they are willing to pay you for it depending on the value you bring to the table. If you are confident (not cocky) about the real value you can provide to your clients, don’t be afraid to negotiate the payment terms you require to succeed, up-front. (Insert your success definition here). It can be to scrape by day to day (and not go bankrupt) or it can mean to have $1,000,000 cash in the bank for a rainy day, it’s up to you. Figure out what your goal is and work backward.

Ex:

Initial Cash at beginning of the year: $500,000

Monthly expenses: $250,000/month

Payment terms (or average collection days): 3 months (or 90 days)

By the end of March you will be $250,000 in the hole (or using your line of credit). What if your monthly expenses are $500,000? Then you would be $1,000,000 in the hole! This might be ok, as long as you are comfortable with it and you plan accordingly.

However, If this is unacceptable, you could negotiate better payment terms with your client prior to signing the contract. Then have up-front agreements that they will honour those terms (assuming the work is done properly, of course).

Less cash out = more cash in

If we use the same example from above:

Initial Cash: $500,000

Monthly Expenses: $500,000

Payment Terms: 3 months

If you’re unable to negotiate better payment terms; other variables you can influence are your monthly expenses. Say you can lower your expenses by 10%, by the end of the year that’s $600,000 in savings and that goes straight to profit (and cash). Here are some areas that could be low hanging fruit; although you might want to sit down…

  • Do your staff need further training or management to grow and become more efficient? There are numerous industry-specific online training systems like Greenius (www.gogreenius.com) that can help close the productivity gap between new and experienced team members.
  • Are you leveraging web and mobile technologies to ensure you are as efficient as possible? Some ideas include GPS fleet management and contract management software for change orders, document management and invoicing.
  • Are you finding you have to replace your hand tools or power tools more often than you would like? Even worse, are they going missing?
  • Are equipment repairs and damages pilling up?
  • Are you ensuring to only use the specified amount of material or do you have wastage?
  • Do you often have to return to site to correct deficiencies? Is it unpaid or warranty?
  • Are you ever getting back charged for damaged property?

If you can resonate with 3 or more items on this list, it would be a daunting task to undertake all of them at once. Tackle one per quarter, and measure the results in order to ensure you are gaining traction.  

Improve your collections

You might have the best payment terms in the business but if you aren’t skilled in collections, it won’t matter. I wrote an entire blog post on this subject, if you are having issues with this, I suggest taking a look:

8 Ways to Improve your Collections as a Contractor

Sell assets that are not generating revenue – or start putting them to use.

Pull out your balance sheet.

Go down the list of Assets.

Are there any that are not directly contributing to generating revenue? Unless they are appreciating in value, you should sell them or put them to work.

Put to work:

  • Equipment that is seasonal can be rented on heavy equipment rental platform, DOZR. Users can search for the equipment they are looking to rent and DOZR will search its thousands of trusted rental partners to arrange the best equipment package. Visit their website here for more info: www.dozr.com
  • Land that is not generating income could be rented, leased, farmed or developed.
  • Free space in your yard, shop or office can be rented.

Sell:

  • Old equipment, attachments and tools that are sitting around your shop or yard which you don’t plan to use in the near future.
  • Inventory that is dated and unsaleable to your clients.
  • Vehicles that are not being used.
  • Old office supplies and electronics that are collecting dust.

Take your bank manager out for lunch

Bank managers can pull strings, but there’s a catch: they only will if they like you. Take them out for lunch once a year, get to know them and genuinely show interest in them. When you are looking for that extra room in your line of credit or a better rate, you can call a friend, not just an administrator.

Utilize government grants wherever possible

Do a quick Google search “Government funding for corporate training”. What can you find? If you operate in Ontario, you can tap into the Canada-Ontario Job Grant [COJG] program: http://www.tcu.gov.on.ca/eng/eopg/cojg/. It covers up to $10,000 per person for training as long as you abide by certain regulations.

A program like this can both save you cash and help improve efficiencies in order to lower costs.

Use your credit cards as much as possible for purchases

There’s a dual purpose here:

  1. You get an extra 30 days to pay your bill from the credit card provider.
  2. You get to collect points that can be used to redeem cash/flights/electronics/etc.

Start asking all of your suppliers for the ability to pay with a credit card. It adds up and it’s worth it.

‘Partner’ with your sub-contractors

Subcontractors are a necessary evil unless you ‘partner’ with them. I’m not proposing legal partnerships here; I’m proposing you develop your relationships in a manner that is mutually beneficial to both parties.

Ensure you have up-front agreements as to when invoices are due in order to expedite payment from the client. For example: If your invoice is due on the 25th of every month and your sub sends theirs in on the 30th, you might miss their portion of work and have to pay their bill before you receive payment. That’s not good for cash flow.

If you work together to ensure all project deadlines are met and have a clear expectation when it comes to billing, everybody will know what’s expected of them and stress will remain to a minimum.

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