Eight Different Ways To Keep Contractors’ Cash Flow In Good Shape
To maintain a healthy cash flow, consider the following best practices:
1. Establish a reserve fund
As several contractors discovered during the 2020 project shutdowns, having a financial reserve large enough to withstand prolonged storms — both literal and metaphorical — is critical. Calculate the company's estimated monthly expenditures and set a target to save enough money to cover them as long as you need. Aim for three to six months for most construction companies. Contributions to the cash fund should be budgeted as a fixed cost, and you should pay it back if you need to use it.
2. Finance assets
Financing is a good way to free up working capital. Rather than purchasing construction equipment and vehicles outright, you can save cash on hand for business by financing or leasing them at a low cost.
3. Get a line of credit
Revolving credit and business lines of credit give you immediate access to a set sum of capital. Generally, you can use credit to pay for things like payroll, materials, and monthly bills. You request only what you need at the time and pay interest for what you use, similar to how you would for a credit card.
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