Managing Cash Flow with 6 Strategies for Reducing Liquidity Risk
In the construction industry, efficient cash flow management is the cornerstone of success. Timely billing and capturing allowable costs play a critical role in the financial health and sustainability of construction companies.
Retainage is a crucial aspect of cash flow management for contractors and is referred to as the practice of withholding a portion of the total billable amount until the project is completed satisfactorily. Retainage percentages typically range from 5% to 10% of the contract value. While retainage is designed to protect both parties and ensure project completion, it can significantly impact a contractor's cash flow, especially when projects extend over extended periods. Contractors may have to wait for months or even years to receive the full payment, which can strain their financial resources and create liquidity challenges.
Here are the top 6 strategies for reducing liquidity risk. These strategies can help contractors manage their cash flow efficiently and avoid potential liquidity challenges.
Standardized Workflow for Cost Capture:
By implementing a standardized workflow for cost capture, including a purchase order process, contractors can ensure that costs are accurately recorded and tracked in a timely manner. This helps in generating invoices promptly and billing customers for completed work or services. Timely and accurate billing can lead to faster cash inflows, reducing the time it takes for the contractor to receive payment for their services. However, sometimes a differential in cash inflows versus outflows may require you to find Working Capital. Express Capital understands that contractors need to stay liquid to maintain operations and structure the financing terms to meet each individual contractor’s needs.
Timely Billing of Customers and Billing Ahead of Costs:
Contractors should aim to bill customers as soon as the work is completed or at specific milestones as agreed upon in the contract. This approach helps in accelerating cash receipts, providing the contractor with cash on hand sooner. Additionally, billing ahead of anticipated costs means that the contractor is invoicing for future work, which can result in a positive cash flow timing difference.
Receivables Collection Strategy:
Developing a receivables collection strategy is essential to ensure that outstanding payments from customers are collected promptly. Contractors should set clear payment terms and follow up with customers who have overdue invoices. By actively managing receivables, the contractor can improve cash flow and reduce the risk of delayed payments affecting their liquidity.
Customer Terms and Quick-Pay Discounts:
Contractors should evaluate their customer terms and consider offering quick-pay discounts to incentivize customers to make early payments. Quick-pay discounts can be financially beneficial for both parties, as the contractor receives cash sooner, and the customer can potentially save money on the overall transaction. Automating the collection process can also streamline the payment process, further reducing the time it takes to receive payments.
Vendor Terms and Payment Timeliness:
Working closely with vendors can provide opportunities to negotiate favorable terms. Contractors can explore options for discounts based on purchase volume or payment timeliness. Stretching vendor payments to the invoice term deadlines can also promote longer cash cycles, providing the contractor with more time to generate revenue before needing to settle outstanding payables. You can also use Working Capital to have more purchasing power when buying in volume to save money on materials overall.
By implementing these strategies, contractors can enhance their cash management practices, reduce liquidity risk, and navigate the challenges posed by the current market more effectively. It's important to regularly monitor and adjust these strategies to align with changing market conditions and the specific needs of the contractor's business.
If you have any questions on how Working Capital can help your cash flow or to learn more, please give us a call at 888-513-9937.
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