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Know Your (Cash) Position

March 22, 2021

The contracting industry is known for being slow to change, especially in areas such as utilizing advances in technology. However, one that thing that never changes is that a contracting company’s lifeblood is CASH. To that end, two of the most critical responsibilities of a prudent contractor are managing cash flow and knowing their cash position.

Often contractors think that just because they have money in the bank, they have positive cash flow. Checking your bank balance is not managing cash flow and it does not accurately indicate your cash position. The main components of managing for positive cash flow are:

  • Active management of accounts payable (what contractors owe to suppliers and when those payments are due)
  • Proactive management of accounts receivable (what customers owe to the contractor)
  • Regular tracking of job costs to ensure jobs stay solidly profitable

When managing accounts payable (AP), an effort that can make a big difference is to avoid paying vendors for project materials before receiving payment from the customer. One way to mitigate this situation is to establish payment terms with vendors which are advantageous to the contractor. For example, when a vendor asks you for their business, instead of just agreeing to provide payment to them in 30 days, request that the vendor grant 45 or 60-day payment terms.

When managing accounts receivable, contractors should avoid extending payment terms to customers. You can establish this precedent by setting up your default customer agreements (and invoices) to state that “payment is due upon receipt of invoice.” These payment terms may be a negotiating point with some customers but, when this is your default, customers will often simply agree to these terms. And give pause to doing business with customers that request extra-ordinary payment terms or have a history (or reputation) of trying to delay payment as long as possible—these might be customers you don’t want to pursue. Lastly, even though this should go without saying, never forget that you can’t collect unless you have sent the bill—so make every effort to invoice your customer immediately upon completion of each job. 

One thing to keep in mind that can often put an unexpected crimp in cash flow is that no matter the payment terms you have with your suppliers or customers, when you are working with a government or municipal entity, payments can be slow due to excess protocols and approvals required before payment for work can be issued. 

Never forget that, as a contracting business owner, accurately tracking your cash flow and cash position should be at the top of your list of priorities!

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