Contractors: 4 practices to improve your cash flow

Saliq Hussaini
Last updated
November 27, 2023

The hassle of managing invoices and payments might feel like a drain on your project or sales focus. However, implementing a consistent process and making a small investment in the right resources can significantly improve your cash-flow management. An effective cash-flow management strategy provides a full picture of your cash inflows versus costs and ensures that you can cover your bills whilst earning a nice profit. Cash flow issues can severely hurt your business & it's critical to install the correct habits throughout the business. These tactics, if practiced, should push your company towards positive cash flow & help you make informed decisions about your business.

1. Choose an invoicing cadence that matches your bill payment cadence

As a contractor or builder, you're constantly spending money and making payments as you complete projects. At first glance, it may feel convenient for you and your customer to send an invoice once a month.

But how does that match up with your expense schedule? If you're purchasing materials every day, completing payroll twice a month, and paying subcontractors every week, your cash flow could be suffering. Consider increasing your invoicing cadence to ensure you can cover your cash outflows at any time of the month to reduce the volatility of your operating balance. One common challenge to a more frequent invoicing cadence: It may become difficult to keep track of your payments & invoices. To avoid human error/manual entry or late payments, we recommend investing in financial software, like Beam, to send & track the status of your invoices.

Along with improving your cash flow, by selecting payment terms that match your bill payment schedule, you can ensure that your subcontractors are paid on time and maintain a healthy working relationship with them.

2. Don’t over-bill or under-bill

While it may be tempting to over-bill or under-bill, each will eventually hurt your cash flow and provide an incomplete picture of your profitability.

Over-billing: Over-billing, or billing a high amount at the beginning of a project, is incredibly tempting. Your margins look terrific and your operating balance shoots up. Although it is temping, it is not an advisable approach. Over-billing gives you and your team an unrealistic view of your business's health and ultimately kicks the can down the road. The excess amount leads to negative cash flow for the remainder of the project.

Under-billing: On the other-hand, do not be the one to finance your customer's project. For example, If you're expecting to complete a significant purchase of materials, it's paramount to bill your customers shortly before your complete a sizable material purchase. Under-billing forces you to finance your client's project, and if a contract or payment dispute occurs you're the party left holding the bag. Lastly, an influx of approved projects in a given month could lead to negative cash flow.

Interested in learning more about construction invoicing? Learn 7 invoicingtips to get paid faster

3. Negotiate and take advantage of discount terms or credit with your suppliers

If you're shopping at the same places every week, you've probably been asked to set up a credit account with that supplier. And why wouldn't you? It gives you more time to pay & provides discount terms for paying earlier.

Unfortunately, many businesses do not take advantage of the discount terms offered by suppliers. A common discount is 2/10 net 30. A buyer will receive a 2% discount on the net amount if they pay the invoice in full within the first ten days of the invoice date. Otherwise, the full invoice amount is due in 30 days without a discount. A 2/10 net 30 is annualized at 36.7%—in other words, yearly interest generated by taking advantage of the discount term is at 36.7%.

Margins in construction are notoriously thin & paying early is a fast, simple way to improve your profit margins. Lastly, The more you spend with a specific supplier, the better leverage you have to lock in great discount terms. This tactic can also be used to reduce your operating expenses - discount terms can be provided by a variety of suppliers & vendors.

4. Put your idle cash to work

Another way to improve business cash flow is by putting idle cash to work. Take advantage of these current, high-interest times and place your operating balance into an account that earns yield. These accounts are commonly FDIC-insured up to $250,000—just make sure funds can be transferred in or out any time in 1 business day with no restrictions.

Beam offers 2.5% APY when you store funds in the Beam Balance, and you can deposit or withdraw funds as often as you'd like in just one business day. A simple change in accounts can help increase your positive cash flow over a period of time.

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