- LATEST HEADLINES
- THE MAGAZINE
Whatever your firm’s specialty, you can’t do a job well without the right tools. So as you work to grow your company by taking on more or bigger jobs, one thing is certain-you’ll eventually need more equipment. The challenge is finding a way to finance equipment while still covering the business’s day-to-day expenses.
Finding ways to invest in a business’s growth can seem like a catch-22 for many contractors. It goes something like this: no big job, no money for the equipment; no additional equipment, no way to get the big job. While finding a way to finance equipment can sometimes be tough, there are ways to strike a financial balance that can help you move toward that goal. For many businesses, the balance to strive for is healthy cash flow.
When cash flow is out of balance, a business can find itself constantly in a game of catch-up, simply hoping to collect money owed so the bills can be paid. If the money you’ve earned is still in someone else’s pocket, you understand how difficult it is to put earnings to work to buy new equipment or take other steps to invest in your business.
Here are some tips that will help you keep money coming in to cover day-to-day operating expenses and build up the working capital you need when it’s time to replace a backhoe or invest in a skid steer or dozer.
Conduct a Financial ‘Site Survey’
For many businesses, periods of cash depletion seem to suddenly appear out of nowhere, but careful tracking can often help spot-and avoid-these situations and keep a business on a path to growing capital reserves.
To avoid cash flow crunches, it’s important to first establish where the business stands financially. So in the same way a construction project has to begin with a proper site survey, a financial plan starts with measuring and assessment to understand the situation thoroughly.
Income statements are, of course, valuable tools to track financial figures such as sales, expenses and profits, but while they’re important, they only represent a contractor’s finances at a moment in time. Really understanding how money cycles through a business requires the broader view of a cash flow statement.
Instead of depicting finances at a specific moment, the cash flow statement reveals the movement of money in and out of a business over time. This view helps contractors understand whether they’re building a reserve of working capital over time, or whether they’re actually depleting the business’s cash.
And just as a site survey keeps crews within the bounds of the site, a cash flow statement is an essential tool that businesses need to continually consult in order to stay within financial limits that will help lead to greater working capital over time.
Target Areas Where You Have Control
Short of a dramatic increase in revenues, an incremental and steady approach is often a dependable way to prepare for financing equipment and other large expenditures. And while there are unfortunately no quick tricks to getting there overnight, the good news is that many of the techniques boil down to one basic principle: slow down outgoing payments and speed up incoming payments. While simple, over time this principle can allow a business to hold onto more working capital and reduce painful and potentially damaging cash-poor situations.
Contractors should start with looking at the side of cash flow where they have the most control: accounts payable. The first consideration is timing. There should be no such thing as letting accounts payable run on autopilot. Every payment should be made with intention and calculation.
When cash is low, businesses should delay payments as much as possible, but without paying late. Holding onto cash just a day or two extra, when multiplied over a number of payments, can add up to a lot more cash on hand at any given time-and that’s what begins to add stability to a business’s finances.
Where there is cash on hand, paying early could mean making money by taking advantage of any special payment terms extended by vendors. If your vendors reward you for early payment with a small discount of 1 to 2 percent, that’s money earned that can be reinvested in the business. If early-payment discounts aren’t currently available to you, consider negotiating with vendors where you have the most to gain and with whom you have a solid relationship. Another possibility is to rely on credit or charge cards that offer early-pay discounts, such as the Plum Card from American Express OPEN.
Beyond the timing of payments, another option is to turn to cash alternatives. One great way to extend the time you hold onto your cash-while still paying on time-is to use charge or credit cards for purchases. Businesses can also consider the often-overlooked possibility of bartering for goods or services, or the use of noncash options such as points and miles from credit card rewards programs.
One last, but very significant tactic, is to simply cut spending. Many businesses feel they operate efficiently, but a fresh assessment of current needs and expenses can often show otherwise.
When looking to cut spending, recurring costs are a major target, because even a small reduction can add up to significant savings over the course of a year. Review, for example, any vehicles or other equipment leases to see whether they still make sense, based on actual use. Some equipment may no longer be needed, or at least the terms of the lease could benefit from a renegotiation. You might also want to assess things, such as the company cell phone use, and modify your plan accordingly. Plans and options can change frequently and your needs may have changed over time, so make sure you have the best deal available.
Speed Up Incoming Payments
For many companies, cash flow boils down to a one-word solution: speed. The faster cash is in hand, the easier it becomes to maintain a healthy amount of working capital. Holding onto cash through accounts payable techniques is generally not too difficult, but when it comes to receiving payments, many small business owners long for more speed yet feel they have little control.
Fortunately, there are some easy steps that can help keep cash flowing. Better yet, while some solutions rely partly on customers’ actions, other solutions are completely in the business’s control and can be put into effect immediately.
One technique contractors can use to help ward off slow payments is simply by stating payment terms clearly-both from the outset and again upon invoicing. Another way of speeding payment is to offer select customers the incentive of a discount for early payment.
While early-payment discounts should be extended only to the most trustworthy customers, accepting charge and credit cards payments can help all types of customers delay their own expenditures while promptly providing you with cash. And regardless of how a customer pays - if a down payment or a larger-than-usual down payment can be negotiated - don’t hesitate to take advantage of it.
Redouble Collection Efforts
Businesses can make real strides in getting paid sooner by taking a more active approach to collections. One way is to make efforts to improve the overall collections process by understanding customers’ billing preferences and procedures.
If your contract, for example, makes specific stipulations about what you need to do to get paid, be familiar with the terms and follow them to the letter. This includes specific procedures about how and when to invoice.
Also be sure to understand what information your customer needs to properly process payment efficiently, such as job numbers, purchase order numbers, your vendor number or other details that will speed up work on the customer’s end. Particularly when dealing with larger customers, such as state or federal agencies, even seemingly small things like having up-to-date information for a contact in the accounts payable department or sending your invoice to the attention of a specific individual in charge of your account, can take days off of payment times in some cases.
Mind Your Credit
If your business is building working capital with its sights on financing equipment or other major investments, the last thing you need is to have slow or late payers disrupt your cash flow and potentially damage your credit.
Businesses can help protect themselves from slow and late payers by putting a reputable intermediary in the middle. One way to do so is to hire a reliable bookkeeper or accountant on a contract basis to handle accounts receivable functions, whose job will be to approve credit, make collection calls, receive payments and make deposits. This can help assure that critical receivables and collections work won’t be pushed aside by other accounting functions that might seem like a priority at the time.
While consistent efforts to even out cash flow and boost working capital can really pay off, even the most diligent business owners can be hit by unexpected circumstances. When multiple projects are greatly delayed, by weather or a natural disaster for example, a contractor’s finances can take a real hit. Likewise, significant unplanned expenses can leave a business in the lurch financially.
To guard against these cases, it’s important to have several sources of financing lined up as a backup plan. Attending to financing options ahead of time will allow you to find the best options. This will not only provide more time to do diligent research, but lenders will look more favorably on your business if you’re seeking financing before you’re in a financial pinch. And when researching financing, be sure not to overlook any special lending programs you may qualify for, such as those designated for small businesses, for businesses operating in economically disadvantaged areas, or those owned by women or minorities.
Financing new equipment for your business is a major step towards growth, but it’s not without its challenges. Just keep in mind that the path can be shortened with strong cash flow practices. And armed with the tips above and a steady approach, you may actually be closer than you think to leaping that next big hurdle.