Checking Your Paperwork for Slow Cash Flow Culprits
Most contractors struggle with cash flow occasionally, if not regularly. These problems can take a variety of shapes and sizes and stem from many causes. One common contributor to cash flow slowdowns is the very paperwork you use to arrange and close out projects: namely, your contracts and invoices.
Read the Fine Print
When you think about money problems, your mind might immediately go to the end of the construction process when you’re trying to get paid. But the seeds of monetary discontent are often sown before a shovel hits the dirt. Case in point: the contract’s payment terms.
In the broadest terms, contractors have two basic options. You can either get payments that are received upon completion of specific job phases or be paid by an owner in equal installments over the course of the project.
If you’ve been accepting one or the other without question, consider the negative impact on your cash flow. Receiving payments on completion puts you at the mercy of the many random events that can delay a project. Meanwhile, the installment approach may leave you underfunded at key moments. You might try renegotiating the payment terms.
Also review a contract’s payment terms in light of the owner. Does the language seem equitable given the person’s or company’s financial strength and creditworthiness? Don’t stop there, either — assess the capacities of suppliers and vendors as well. And, as a job gets underway, try to establish a good working relationship with the owner’s accounts payable representative to ensure the payment terms will be followed.
Know Thy Customer
Of course, it’s indisputable that cash flow issues often originate with owners. Whether people or companies, project owners will typically delay payment as long as possible to benefit their own cash flows. Meanwhile, your unpaid invoices may pile up and your cash flow drags.
One general rule of thumb says that contractors must live with getting paid within 60 to 90 days. But, to boost cash flow, set a company objective to whittle that down to 50 days or even less. The nuts and bolts of precisely how to do so will vary, depending on the type of construction work you do and the structure of your contracts. But there are certain tried-and-true procedures that can help. Use an electronic billing system to invoice owners instantly. Revise your invoices so they clearly express terms, amounts and consequences for tardy payments.
Moreover, abide by that old expression: Know thy customer. Familiarize yourself with each owner and scale your invoicing procedures to suit the situation. With some owners, a clear invoice alone will do the trick. But others may need a call for a more hands-on approach. This is particularly true when dealing with an owner that has given you payment problems in the past. In these cases, make an extra effort to invoice the customer on time and be prepared to follow up diligently.
No one loves doing paperwork, but these two types of documents — the job contract and your invoices — can drive the success or failure of a project. So, be sure to cross your t’s, dot your i’s and know precisely what you’re signing off on.