7 Ways to Bolster Cash Flow In Your Contracting Business

Contributed by Samantha Novick, Funding Circle

Managing cash flow can be tricky in any business, but it’s especially tricky in the home service business. After all, taking on a new project often means covering the cost of materials and other expenses out of pocket — and waiting until the entire project is complete to recover those funds. The good news is that there are lots of things you can do to bolster cash flow without disrupting the flow of new projects into your business.

Try these seven to start!

1. Review projects and cash flow monthly.

At the end of the month, take a look at your revenue, accounts receivable and accounts payable. Check for any invoices you haven’t paid and any money still owed by a client. Also, review project expenses to make sure you haven’t gone over budget.

Beyond project—specific costs, make sure you’re keeping general tabs on your cash outflows. Auditing your financial records can help you identify expenses that can be eliminated, or at the very least, reduced. For example, you may find that you’re still paying for a magazine subscription or business membership that you’re no longer using. Or, maybe you realize that you’re being charged a hefty sum for your Internet services, and by negotiating with your current vendor or signing up with a new vendor, you could save a chunk of cash. While these savings may seem minimal taken individually, they can quickly add up to something more substantial.

2. Update project payment terms.

Waiting until a project is completed to be paid in full may be unrealistic. A simple solution is to rethink the payment terms you offer to your customers.

For example, you could ask for a 50% deposit upfront, with the other 50% paid at the time the project is completed. Or, you could ask for a smaller percentage to cover the cost of supplies and materials needed to get started, then split the rest of the invoice across two to three payments.

3. Rework payment terms with vendors.

Asking your vendors or suppliers to update your payment terms is another option for managing cash flow. You might ask them to extend payment terms, for example, so that the due dates coincide with when your customers pay you. This way, you’re not scrambling to pay invoices.

4. Make it easier to get paid.

If you only accept checks or cash in your contracting business, you may be doing your cash flow a disservice. Accepting debit card, credit card or electronic payments online makes it easier for your customers to pay you, potentially cutting down on lag times to receive payments.

5. Weigh the benefits of leasing versus buying.

When you need new equipment for a project, think carefully about whether it’s better to buy or lease from a cash flow perspective. Buying outright means tapping into cash reserves while leasing would require you to make a monthly payment. Crunching the numbers can tell you which option is more cash—flow friendly.

6. Reevaluate your pricing.

It’s important to revisit your pricing regularly. Establish a standard markup, which is the number required to cover your overhead costs and ensure a reasonable profit. Also, perform job costing regularly — comparing estimated costs with actual costs at the completion of every project. With this data, you can determine whether or not your prices are set at an appropriate rate to help you reach your target net profit amount.

Undercharging could not only be damaging your cash flow, but also the entire trajectory of your business.

7. Explore business funding.

If you find yourself in a situation where you’re completely strapped for cash, it may be time to consider small business funding.

Maybe you already have several high—interest forms of financing, and the monthly payments are seriously hurting your cash flow. In this scenario, you may consider
consolidating business debt under a single new loan with a lower interest rate. Not only could this save you money in the long run, as you’ll be paying less interest over the life of the loan, but it could also reduce your monthly payment, leaving you with extra disposable cash each month.

Or, maybe you simply need a boost of capital to help cover the upfront costs of a project or to tide you over during the down season. There are a variety of small business loans, from business lines of credit to term loans, which can help to bridge the gap.

These are just a few ways to give your cash flow a boost. Not sure where to get started? Try something as simple as increasing your markup by 2% and cutting your overhead by 2%. There are also a number of creative initiatives that can bring additional business your way.

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