Training & Education
Level Up • Seven signs contractors have big problems with cash flow
By Andrew Houston
May 10, 2019 – What if you never had a lack of cash? What would it be like? Would you have less stress? Buy new equipment? Give yourself a paycheque?
It is nothing new to suggest contractors are likely to encounter cash flow issues, but you may be unaware you’re living day to day within a stifling context that is stunting your growth. You’ve been living it for so long, you’ve forgotten what anything else feels like.
So, it is important to keep an eye out for the following tell-tale signs:
1. You are scared to look at your bank account
You’ve been taking on lots of jobs lately, your crews are busy and you’re certainly busy. Yet, despite that, you know when you muster up the courage to stare down those digits next to your account, you’re not going to be happy with them. So, you don’t look.
2. You constantly shuffle money around from one supplier to the next
Your suppliers are offering discounts for prompt payment, but you’re struggling to pay them in 30 or even 45 days. You know things are approaching a disastrous state, but you only have enough cash to pay just one of your suppliers.
3. No matter how much work you land, you’re still broke
You’re looking for as many ways to save cash as possible—driving old trucks, using old tools and equipment, You’ve thought about shutting down your business; maybe you would be better off as an employee, instead of an employer.
4. You feel like a bank to your clients
Just as you’re in debt to your suppliers, so too are there more clients who owe you money than those who have settled up. Everyone wants to get paid, but nobody wants to pay you.
5. You can’t predict your cash flow
The busy season means too much work, which leaves cash tied up in payroll. At quieter times, too little work means no cash is coming in and you can’t keep your crew busy.
6. You can’t pay your tax bill
Another quarterly business tax bill has come in from the government and you can’t pay it. The penalties are severe. So you start panicking and dropping your prices to get more work to pay the bill.
7. You pay yourself last, not first
When you sit down and look closer into what you’re actually making per hour, you figure out you’re actually the lowest-paid person in the company.
The next steps
Cash flow issues for contractors aren’t going away, but there are actions you can take to escape the cycle and gain control.
Forecast your cash flow
This is a matter of balancing how much cash is coming in and going out of the business. It is not your bank statement, but a report that tells you your current cash-flow situation, which can then allow you to predicts weeks ahead—if not months—whether you are going in the right direction or need to course-correct.
Ensure you quote profitably
You also need to balance different cycles in sales against your breakeven margin, i.e. the amount you need to cover your overhead expenses. Then you need to consider your yearly profit goals and work them into your quotes. If you do not, you could be quoting yourself out of business.
Use an accounts receivable system
Every extra day your clients hold onto your money is another day you are acting as their bank. Too often, contractors simply call their clients again to ask, “When can we expect payment?” Instead, you need an accounts receivable system set up such that it does most of the heavy lifting, can be delegated to your team and includes an escalation component. If you systematize accounts receivables, you can be in the driver’s seat.
Andrew Houston is owner and founder of Profit for Contractors (PFC), an industrial controls licensed electrician and an electronics engineering technologist. He helps entrepreneurs in the skilled trades improve their business skills, so they can enjoy more control, freedom and money. To register for his free ‘cash flow mastery’ webinar, which discusses cash-flow issues and strategies to improve your business, visit www.contractorprofitmastery.com/opt-in. You can also join PFC’s Facebook group, ‘Contractor Tips.’
This column originally appeared in the May 2019 issue of Electrical Business magazine.