By Tom Bailey, Principal, Councilor, Buchanan & Mitchell, P.C. – CPAs & Business Advisors
A good way to think about cash flow is to see it as your business’ wallet. Cash flow reports are crucial tools for business owners and managers to help them understand where their business’ money is coming and going, and when. Making decisions based on that information is key. Establishing good accounting and financial practices is a good way to identify and manage cash flow issues. Other strategies that will help include financing fixed asset purchases whenever possible, invoicing promptly and regularly offering discounts for early payment, avoiding over and under billing (both negatively affect cash flow management), and speeding up closeout processes. Managing cash flow is crucial within the subcontracting industry and is a spot most companies struggle with. But making a few simple changes can greatly improve your cash flow system.
Net Profit or Cash Flow?
Knowing and identifying the difference between net profit and cash flow will increase your knowledge of details within the cash flow system. Companies often find themselves profitable but with a negative cash flow. This is caused by having multiple projects occurring and not billing your clients consistently and on a timely basis. Collecting unpaid invoices and creating a billing schedule for clients is also important. Problems with billing can affect timing for accounts payable and accounts receivable. This can greatly affect cash flow because companies may end up finding themselves paying vendors before they get paid. Looking at job details and knowing when money is coming in will help a company better manage their cash flow.
Mind the Gap
With subcontracting companies, closeout can affect cash flow because it can make demands on a lot of your business’ money due to last minute issues that arise. Being prepared can help. What you can do to avoid an unpleasant situation such as this is close the gap between collections and payments, use cash flow projections to plan out the timing of cash flow for different projects, and bill consistently. After starting with essentials such as these, you can continue to manage cash flow.
Plan the Payments
One other planning strategy is to review the due dates of predictable expenses such as taxes, marketing costs, insurance and rent. Consider paying those types of expenses when bills for big projects are not due. By having a timeline and a detailed budget, it will provide a clearer picture of all project and company expenses, and it will contribute to a great cash flow system. Breaking up your invoices by buying smaller amounts of inventory, requiring order payments up front and hiring staff during busy seasons can help shorten and improve the cash flow cycle. A cushion of funds is also helpful so when emergencies come up, businesses don’t need to dip into general funds.
A variety of strategies also exist for subcontracting companies to manage their cash flow management at different stages of their jobs and projects. On the job companies should focus on budgeting, forecasting and negotiating. Establishing these effective cash management controls can help a company be better prepared for the project and boost the project’s overall cash flow.
Companies should also be aware of progress billings, payment clauses and retentions. By understanding the details of smaller items like this, it makes the entire job and finances flow more smoothly.
During the job, businesses should focus on accelerating cash receipts and decelerating cash disbursements. Accelerating cash receipts consists of billing clients on time, and monitoring receivables and deposit controls. Decelerating cash disbursements involves companies using company credit cards, recruiting outside labor and performing cost-benefit analysis for vendor discounts. These steps will help limit the amount of cash leaving the company which positively affects overall cash flow.
Closeout Checklist
Finally, after the job, companies should focus on using a closeout checklist to lessen the probability of something going wrong and being aware of overruns because they can affect profitability from the job. Businesses can use creativity to find potential new sources of revenue outside their regular operations, such as through a short-term investment.
Cash is fundamental for businesses throughout the subcontracting industry and developing a better understanding of how to effectively manage cash flow can greatly improve your ability to manage your operations without surprising and unpleasant distractions.
About the author
Thomas Bailey, CPA, CVA is a principal and director of the construction and real estate practice at Councilor, Buchanan and Mitchell, P.C., an accounting and advisory firm that serves clients in the Washington, DC area and the Mid-Atlantic region. Tom has 25+ years of experience in public accounting and has been actively involved as a presenter and a member in the Washington, DC chapter of the American Subcontractors Association. His professional experience includes all areas of income taxation, planning and compliance, compilations, reviews, and business valuations. Tom is a certified valuation analyst.
