Cash Flow Strategies to Consider During COVID-19 and Beyond
As there continues to be economic uncertainty due to the COVID-19 pandemic, the construction industry, like many others, is feeling the financial impact. While the pandemic may have forever changed how the world conducts business, cash flow fundamentals remain the same. How your company comes out of these uncertain times will depend in large part on how successful you are in managing cash flow.
Short-Term Cash Flow Considerations: Short-term cash flow planning is necessary to help your business continue to operate. Below are some practices to consider implementing today:
Create a short-term cash flow model to assist with monitoring cash needs on a daily and weekly basis. Creating a document to monitor the cash flow in and out will allow you to anticipate when cash will be tight and make decisions accordingly.
- Be mindful or implement good billing, payments and collections practices:
- Bill early and often. If need be, negotiate for more accelerated billing terms in your contract up front.
- Make sure that your progress billings are based on the work performed to date, not just the work for which you have a time card or received an invoice.
- Process change orders as quickly as possible.
- Consider offering early payment discounts as an incentive to your customers.
- Negotiate for early release of retainage billings, or total exclusion from retainage.
- Expedite the punch list closeout phase of the job in order to free up retainage billings more quickly.
- Follow up on accounts soon after they become past due and maintain regular contact with the customer until they are collected. The “squeaky wheel gets the oil” syndrome holds true in this area.
- Send monthly statements on all past due accounts.
- Implement a policy of assessing service charges on past due invoices.
- Hire a collection agent for accounts that are excessively past due.
- Take advantage of purchase discounts by paying early.
- If payment terms do not allow for discounts, pay on time, but not before.
- If retainage is withheld on your billings, consider doing the same for your subcontractors on the job.
- Review contracts in progress and backlog to determine your approach and plan to complete these contracts. This process may require updating forecasts on estimated costs to complete for contract delays, changes in productivity, and supply chain disruption.
- Focus on communication with customers, including written documentation to assist with potential future claims and cost recovery.
- Obtain a working capital line of credit with a bank, or if you already have one consider increasing the borrowing limit while you still have good back log to work off. If possible, negotiate a longer term than just one year and make sure any financial covenants are not too burdensome, especially if your business is seasonal.
Long-Term Cash Flow Considerations: While focusing on the short-term cash flow will help you through a crisis, the long-term view will allow you to see how the pandemic will affect your business, how long will it take you to recover and allow you to make strategic business decisions.
- Evaluate personnel costs to support operations and determine your personnel needs. Consider volume of work (or backlog) you will need to maintain a certain level of personnel.
- While you may want to take on jobs with low margin to continue to keep their personnel or cover certain overhead, you should take a harder look at these jobs to ensure a profit margin is really feasible in current and anticipated future conditions (such as potential delays due to COVID-19, supply chain, rising material costs, etc.)
- Review operating expenses and consider: are these cost necessary? Is there a more efficient or cost-effective way of getting the same results?
- Review of capital expenditures for idle equipment that can be sold or planned expenditures that may no longer be needed. Also, consider financing versus paying cash where possible. Do not use short term financing to pay for purchases of long-term capital expenditures.
- Delay or cancel using cash for other investments that’s not part of the core business.
A good cash management strategy is key to survival in the construction industry. While these practices may seem obvious, its successful application will determine how well a company performs during these challenging times.