By Patrick Hogan, handle.com
Running a construction business is no small feat, and the challenges of operating in this industry are well-known. From financial fluctuations to regulatory hurdles, these challenges make subcontractors some of the toughest business people in any industry. For every issue, of course, there’s a long history of subcontractors learning lessons and forming tactics and strategies to weather these storms. This article will shed light on the ways to manage these crises effectively.
Focus on Cash Flow
A robust cash flow is the lifeblood of any business, much more for smaller operations like specialty subcontracting. In many cases, inefficient payment processes cause bottlenecks in cash flow that make it difficult for subcontractors to weather internal or external irregularities. Focusing on streamlining payment processes and ensuring funds are available when needed will create relative financial stability that allows construction businesses to avoid unnecessary risky decisions and move without haste.
Cash Flow Tactics for Construction Subcontractors
- Utilize an Efficient Invoicing System
Create and send invoices promptly after completing work with digital invoicing tools to minimize delays in payment processing. Set automated reminders for overdue payments to reduce time spent following up on unpaid invoices.
- Negotiate Favorable Payment Terms with Suppliers and Clients:
Align staggered payment terms with suppliers and client payment schedules to ensure that cash outflow for materials matches incoming payments for completed work. This smooths out cash flow and minimizes the need for short-term financing.
- Establish a Revolving Line of Credit or Short-term Financing:
Draw funds as needed to cover short-term expenses by establishing a line of credit with a financial institution. This helps during periods of irregular cash flow, enabling you to meet obligations while waiting for payments from clients and repay the credit as payments are received.
- Implement Rigorous Financial Planning and Forecasting:
Conduct regular cash flow forecasting to predict when cash flow might become tight and take proactive measures to address potential shortfalls. Analyze upcoming expenses and expected payments to make informed decisions, such as delaying non-essential purchases or negotiating extended payment terms, to maintain financial stability.
By actively engaging in these tactics, subcontractors can optimize their cash flow and reduce vulnerabilities from inefficient payment processes. The key lies in the timely execution of these strategies and continuous monitoring.
Take advantage of your legal rights
While being optimistic and trusting of the business you’re dealing with is essential, those who work in construction know that protecting your financial health is paramount to business continuity. Protecting your right to payment is not simply a matter of trust but a strategic necessity in an industry known for its complexities and risks. Fortunately, legal tools like the mechanic’s lien allow subcontractors to safeguard their interests if there are changes in the hiring party’s ability (or willingness) to pay. Utilizing these tools requires awareness and diligence, but they provide a vital layer of security in the often unpredictable field of construction.
Of course, the right to assert a mechanics lien comes with responsibilities, which vary depending on the project’s location, but generally, preliminary notices are required. Preliminary notices help keep all parties informed about a project, promoting transparency and fostering trust among contractors, subcontractors, and property owners. By issuing these notices at the onset of a project, subcontractors can ensure alignment from the start, setting the stage for prompt payments and effective communication. This proactive step not only helps in managing financial risks but also in building strong relationships that are essential for the long-term success of any subcontracting business in the construction industry.
Building a Proactive Strategy
Active planning is essential for crisis management. Assess potential risks, develop contingency plans, and ensure that your team is equipped to adapt as necessary. Embrace technological solutions that suit your business needs, and don’t shy away from legal tools that can protect your interests, setting you on a path toward resilience and long-term success.
In the construction industry, challenges are inevitable. Economic fluctuations, regulatory changes, and other unexpected events can all impact small subcontractors. By understanding these potential challenges and actively preparing for them, you can navigate them successfully.
Effective cash flow management, utilization of legal tools like preliminary notices, learning from real-world examples, and proactive planning are all part of a comprehensive strategy. By putting these pieces together, you build not only a resilient business but one that’s able to achieve continuous success.
About the Author: Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors and material suppliers with lien management and payment compliance. The biggest names in construction use Handle on a daily basis to save time and money while improving efficiency.
