In a matter of weeks, the U.S. has gone from a booming economy with record low unemployment to a virtual standstill. Many construction contractors are still awaiting potential impacts, while others are struggling to stay alive. Cash flow for contractors is always a key factor in any successful business, and in times of crisis, it becomes even more so. Here are some key considerations to implement immediately:
- Develop a cash flow schedule by job—for contractors, determining your cash flow by job can help you identify which jobs are helping and hurting cash flow. This schedule will enable you to take immediate and direct action from a solid business position.
- Determine your non-job cost “burn” rate—immediately determine which costs are not job costs. Determine your monthly, weekly, and even daily cash needs, and which of these costs can be cut or deferred.
- Take decisive action within contract limits—for contracts that are not adding positive cash flow, determine if the problem lies within the contract terms, contract management within your control, or management not in your control.
- Retainage—consider that if retainage is 10% and the gross margin is 5%, your contract can be easily forced into a negative cash position. Determine what percentage of your accounts receivable is retainage. The higher the percentage that is retainage, the more significant stress there is on cash flow. Be sure retention terms with subcontractors corresponds with that of the contract. Discuss retention terms with owners and ways to reduce or release retainage sooner while still giving the owners the security they need. Owners should be willing to work with you to prevent any disruption on their projects.
- Manage under billings—aggressively bill for work performed. To limit under billings, bill timely and more often, if possible.
- Manage contract cost—get paid first. Payment terms with vendors should be longer than payment terms from contracts. If your contract includes a “pay when paid” clause, then honor it. In these times, your subcontractors will understand and need to be doing the same. Be sure to extend payment on payables as long as possible.
- Financing—talk with your bank about deferral of loan payments, and expansion of short-term cash availability through lines of credit. Also, check on the availability of funds from federal and state programs, such as the CARES Act recently passed by Congress.
As your business continues to weather this current storm, it’s helpful to have a team of professionals by your side to offer guidance and support when it comes to evaluating choices and assisting with difficult issues. Be sure to reach out to a CRI professional for more information regarding cash flow and maintaining success in your business.