This question is all too common in the construction industry, and even profitable construction companies can have cash flow problems. The construction industry can be fickle at times. As a general or subcontractor contractor, you may not have work for an extended period of time which may put you in a financial hole. When a new job finally shows up, the ability to buy materials or rent specialized tools or machinery on short notice can be the deciding factor on whether you can bid to win the job. In this crazy economy, you may not have the cash you need to make this crucial investment.
It is now more difficult than ever to get a fast, short term loan from a bank. If you are a contractor who has been using credit cards to finance life’s necessities, you are very unlikely to get a positive answer from a bank to a loan request.
All business is in the construction industry require cash to stay in business. The recession has hit the construction sector hardest of all and for that reason, many banks are balking at the idea of providing financing in this industry but if your business has solid foundations, there is hope for your business.
For years, lack of control over cash flow has been a major contributing factor to the high rate of insolvencies in the industry; therefore, it is a subject that should be taken seriously by all contractors
Simply stated, contractors go out of business because they
Run out of money, not because they run out of work.
Contractors that are about to start a significant project or a significant amount of new work are especially at risk. What is the cash flow impact of this new work? How much of an investment will the company need to make before the project(s) produce positive cash flow?
In simple terms, cash flow planning is the charting of cash movement into the production process, then into accounts receivable, and back into cash. By compressing this cycle into the shortest period possible, a company can create more leverage for every dollar of working capital in the company. Preparing a cash flow plan is merely an attempt to predict the flow of cash during a future span of time. In our experience, companies with the most control over this process are the ones most likely to be in business ten years from now.
Cash flow problems can be caused by a number of factors, many of which are unrelated to job profits. Examples include:
- Labor-intensive work
- Payments made to suppliers or subcontractors before receiving cash payment from the related project
- Cash purchases of fixed assets
- Time lags between billing and collection of receivables (slow payers)
- Internal time lags between end of period date and submittal of requisition
- Investments in joint ventures
- Cash used for outside investments
- Cash advances or loans to officers or employees
- Overstock of inventory
- Unfavorable legal settlements
Today, construction companies are using many of the time tested cash management techniques that have been used for years in other industries.
Cash flow problems can be controlled if they are identified and addressed early. If ignored, they can result in increased interest expense, increased investment of owners’ capital, diminished credit ratings, inability to take advantage of new opportunities and ultimately, failure of the business.
Many companies hesitate to engage in cash flow planning under the popular misconception that meaningful cash flow forecasts aren’t possible. Although it’s not an exact science, proper cash flow planning can help a business make intelligent decisions regarding budgeting, capital expenditures, financing, compensation and growth. It can help make the company more efficient and inspire the confidence of bankers, sureties, customers and other business partners.
In order to maximize cash flow and income, the data required to implement and monitor cash flow should be integrated with the contractor’s procedures for estimating and bidding projects and for scheduling and monitoring performance on contracts in process.
With today’s advanced computer systems and lower prices for sophisticated construction software programs, such as Timberline, there is little reason for contractors to be unable to accomplish this integration.
Project planning is fundamental to the task of preparing a cash flow analysis. In order to analyze cash received and cash disbursed, the contractor must have a good understanding of when it is going to perform various segments or activities that comprise the project. It cannot be calculated simply as a function of time.
It is imperative that companies determine when activities are to be performed and have a thorough understanding of the constraints of the technical relationships between activities and the availability of a company’s resources.
For example, we recently began working with a new client who was experiencing cash flow difficulties. As we examined a number of their contracts, we noticed how activities triggered billing and identified numerous lost opportunities to improve cash flow. When we met with their project management personnel, we were able to show them these lost opportunities. In one particular contract, they installed a very costly piece of equipment two days after the requisition cut-off date.
We advised them to review their contracts and share important dates with their team. They needed to focus on completing certain tasks before critical billing dates. Our new client learned a very costly, but valuable, lesson in planning. Not having a clear understanding of situations like this cost companies thousands of dollars and slows down the receipt of cash for at least thirty days.
Common Deficiencies that Drain Cash Flow
Some common deficiencies that drain a contractors’ cash flow include:
- Not closing out completed projects-This can result in final change orders not being resolved and holds up payment of final requisition and retainage.
- Not having standard procedures to issue payment requisitions on a timely basis-Some public agencies pay within forty-five days, yet the contractors’ average days of accounts receivable is more than seventy-five days. This means that thirty days of the cycle are within the company’s control.
- Assuming there is nothing a company can do to speed up collections and ignoring the aging of receivables-Customers need to be reminded that they owe you money and that you haven’t forgotten about them. Consistent (and persistent) phone calls are a must.
Cash Flow Strategies for Contractors Who are Staying Awake at Night WorryingRunning Run out of Money But Not Running Out of Work.
While planning and monitoring are extremely important, there are also many simple action steps construction companies can take to improve cash flow, boost cash reserves and strengthen borrowing capacity.
You can schedule payments by due date, considering the relative costs and benefits of any available discounts for early payment-mail checks as late as possible, but avoid late payments.
When bidding a job, evaluate the cash flow impact of payment terms and retention release provisions. You can negotiate any appropriate changes before the contract is signed.
You must plan the way a job will be billed before it starts: Although overbilling can improve cash flow, too much over-billing may mean that a contractor is borrowing from one job to pay for another. To avoid job borrowing, match payments to subcontractors and suppliers with collections from related projects.
You must always avoid under-billing on projects.
An important strategy for general contractors is to apply retention to subcontractor payments that correspond to the retention applied by the owner. When dealing with public contracts, inquire about substituting municipal bonds for retainage. This technique generates interest income, which will boost cash flow and net profits.
You must be sure that change orders and claims are billed and collected as soon as possible after they are approved. Other important strategies for contractors:
- Establish an adequate credit line with a bank
- Secure long-term financing for fixed asset purchases
- Consider leasing rather than purchasing fixed assets
- Make sure that delayed payments (e.g., claims and delinquent change orders) include increases for the cost of cash
- Consider depreciation methods for tax purposes that accelerate deductions and decrease tax liabilities
- Get involved in the tax planning process-understanding the tax impact of various activities and strategies is key to your business
- You may want to apply for MICRO LOANS which provides unsecured financing for contractors
PBI unsecured contractor micro loans can take care of the financial needs many contractors are looking for when investing in their company.
We provide micro loans for contractors and subcontractors so that you can source the necessary finance that will enable you to have a huge impact on the success of your business when you need it. Unlike traditional banks our loans are based on the health of your company and cash flow, NOT on credit scores.
You’ll get a complete financing solution, when you want a loan of $5,000 or $250,000+ with a term of 3 months to 18 months. The easy application process consists of a simple one page application and 4 months of bank statements plus your profit & loss statement. Loans come with fixed interest and fixed payments; that are approved in 72 hours, funded in 7-10 days and have an easy 1 page application.
No hassles and no long waits for a response. This helps you can focus on running and growing your business.
We understand business – businesses need capital to work, and bank loans are tough to get, even for healthy small businesses. The difference we make besides our exceptional customer service and our professional and experienced opinion is the reality that you can receive your funding easily and quickly.
Apply for Contractor Finance today…
MICRO LOANS FOR CONTRACTORS AND SUBCONTRACTORS
We have over 20+ years’ experience working with contractors, subcontractors. Our understanding of your business sector means we can tailor the financing we provide to suit your needs. So whether you want to fund a partnership buyout, business acquisition or simply need a new drawing board we can offer you the perfect finance solution.
Our financing is flexible. It gives you the chance to decide how and when you want to spend your loan and the timeframe in which to pay it back.
Enquire about loans for contractors today and receive your funding now.
HOW CAN UNSECURED MICRO FINANCING SOLUTIONS HELP YOU?
Our micro loans for contractors can help you to keep your cash flow running smoothly. It could help you to pay for a large expensive item or simply give you a little extra to help you pay the bills. And the difference our financing for contractors can make is enormous. We understand the complex regulatory environment you operate in and we can tailor our micro loans to suit your needs.
MICRO CONTRACTOR LOANS OFFER THE FOLLOWING BENEFITS:
- Budget planning – our unsecured loans for contractors have proven returns on investment, allowing you to purchase specialist equipment and technology while minimizing your capital outlay
- Alternative credit – our unsecured micro loans do not affect your other credit lines so you can dedicate your existing sources of funding to other projects
- Flexibility – we can cover almost all aspects of your business expenditure
WHAT CAN CONTRACTOR MICRO LOANS HELP TO FUND?
- Annual premium
- Computer hardware
- Tax Funding
- Specialist CAD software
- Large plan printers
- Office equipment and furniture
- Practice relocations, acquisitions or expansion costs
- Practice refurbishment
- Partner buy-ins/buy-outs
- Recruitment fees
- IT hardware and software
- Marketing and Sales Development
- Much more
Call us today and one of our experienced managers will be delighted to assist. Our suite of lending solutions and panel of financial providers means we can tailor our loans to suit your individual needs, allowing you to overcome or prevent any cash flow difficulties. We offer a swift, confidential and personalized service, and our experience allows us to understand the issues affecting contractors.
Apply for Micro Financing Assistance Online
Our unsecured micro loan is an agreed loan not secured against business or personal assets. It has been created to allow businesses to:
- Enjoy greater financial freedom to invest as they choose
- Gain significant cash flow advantages
- Gain access to an additional line of credit
- Invest with less risk, as loans are not secured against personal or business assets.
An unsecured micro loan offers a host of attractive benefits. These include:
- No impact on existing banking arrangements –existing financial arrangements will not be affected at all
- No deposit – there are usually no deposits or pre payments required
- No invoices – usually there is no need to present invoices
- Tailored loans – agreements can be customized to individual requirements
- Fixed charges – repayment and interest charges are fixed for the duration of the agreement
- Repayment periods – repayments and interest charges are scheduled over an agreed period of time, usually between 3 months and 18 months
- Payment of funds – funds are paid direct into your business
- No limits – the loan can be used for virtually any business purpose from Office Furniture to Relocation Costs or Private Medical Schemes; Refurbishment; IT Hardware/Software; Telecoms; Office Equipment; Furniture; Building Works; Tax Liability; Vehicles; Expansion; Relocation; Practice Acquisition; Partnership Buy In/Out; Practice Mergers; Recruitment; Fee Purchase; Partnership Equity Purchase; Professional indemnity insurance and more.
The PBI Micro Loan Promise
From our extensive experience, we believe that our clients’ business interests and requirements are best served by us acting as a partner, rather than simply a supplier of funds. Our policy is to listen to our clients’ long and short term business plans before recommending an appropriate financial solution. This pledge to engage carefully with clients’ business needs and aspirations is just the first step in what we call the PBI Micro Loan Promise.
The PBI Micro Loan Promise comprises a number of undertakings we give to every one of our clients. It can be described as follows:-
- Listening and learning – we undertake to listen to our clients’ business objectives and learn how they wish to grow their business.
- A personal approach – no two clients’ plans or ideas are the same; we treat every practice’s needs individually.
- Total confidentiality – clients can be assured of our complete discretion.
- Minimal bureaucracy – paperwork and administration are kept to a minimum.
- No prepayment – to ensure continued smooth client cash flow, we never ask for prepayments or deposits.
- Fast response – we do our utmost to avoid delays or bottlenecks in order to effect solutions swiftly and effectively.
Cash flow is just as important to a contractor’s business as profitability. Cash flow planning is challenging and inexact, but it is critical to be aware of potential problems in order to minimize their impact on the business.
Whether you require new plant or machinery, hire purchase contracts or lease agreements, you need the right finance going forward. Every day we help companies just like yours turn things around against seemingly impossible odds, regardless of your situation we can help. Contact us today and we’ll be able to do discuss construction industry case studies as well as finding out more about your business in order to provide bespoke corporate finance advice
If you would like to apply for a micro loan call us at 415-678-9965.
Please advise how we can help you succeed in your business.
The Business Doctor
Profit Builders Inc.