Best practices for managing income, expenses and cash flow

By Mahyar K. Hansotia, President of Sobel and Company, Professional Corporation

Before the spring building season heats up is the time to review your business’ financial management. Especially for contractors, it can be challenging to keep your accounting processes on track, particularly cash flow, through the busy seasons. But by consistently following some best practices across several areas, there are things you can do to manage your income, expenses and cash flow throughout the year.

Accounts receivable

The bane of any business can be ensuring that invoices get paid, on time. Clearly establish your terms at the outset of a job, and always check the customer’s credit before accepting work. Being diligent about invoicing promptly upon completion of work is often a stumbling block for busy owners. But there is plenty of invoicing software options available for contractors that can automate the process, keep track of receivables and quickly contact customers with a reminder. For large or lengthy jobs, request a deposit from the customer and issue interim bills at agreed upon timelines as the project progresses. You many want to consider offering a discount as an incentive for early payment. Many payment terms are still 30 days but given today’s digital banking environment, credit card or e-transfers allow for faster collections and can ease cash-flow issues.

Many contracting businesses have larger clients. Often times, these clients will only pay when the cash flow situation suits them, leaving you in a difficult situation as you also have expenses that need to be covered. Because these clients are large, they may constitute a big component of your overall revenue and you don’t really have a choice of walking away. If you find yourself in this situation, consider selling your accounts receivable (also referred to as factoring in accounting terms). Alternatively, you can get a line of credit secured by your accounts receivable.

With regards to larger clients that may comprise most of your revenue, it’s important to analyze this risk. You may need a strategy to deal with diversifying your business more so to avoid the serious consequences of losing a large client.

Inventory

Gaps in inventory create inefficiencies for everyone, and it can also result in lost revenue, especially for smaller renovators and homebuilders. Contractors tend to order products at the last minute and keep a minimal amount of materials on hand, but regardless of the size of your business or inventory, a process for tracking – and good communication – is critical. It’s always worth an investment of time to review your supply management system – no matter how basic – and look for efficiencies. It’s also worth leveraging technology, whether using business-specific accounting software or even inventory-tracking apps that can be used on your smartphone. For custom orders, consider requesting prepayment from the customer for parts and materials needed, as a way to reduce your expenses.

Expenses

Speaking of expenses, it’s a good idea to minimize excessive payments. Begin by monitoring any discretionary costs, including advertising, promotion, office and vehicle expenses, etc. When it comes to fixed expenses, get several quotes for items such as insurance, bonding and maintenance.

Negotiate interest rates and bank service fees and request volume rebates from suppliers. If your business requires investment in larger equipment or vehicles, consider financing the purchase over several years to smooth out payments. Few businesses have the funds on hand to buy it outright, and how you choose to finance the equipment will also impact cash flow. There are also various tax advantages to consider depending on the financing option you choose, and how it is structured. Lastly, review open jobs and compare actual costs to estimates and budgets to avoid cost over-runs, and improve accuracy in the future

Accounts payable

As with anything, timeliness is always a best practice. Paying preferred suppliers on time will not only result in better service but also makes it more likely they will help you in a pinch if you need a rush delivery or a hard to find item. It can also be worth asking for early payment discounts or extended payment terms. When applicable, review contracts to ensure hold backs are applied. It can be easy to postpone paperwork but it’s never a good idea. Ensure long-term loan payments are made on time to avoid penalties and maintain good credit reputation, and file government reports/remit payments by due date for payroll deductions, sales taxes, etc. to avoid penalties.

Like it or not, maintaining accurate and up to date records are critical to properly managing your business’ day-to-day, and long-term financial health. Retaining a qualified bookkeeper will allow you to do what you do best – focus on the business and income generation side of things, but you can also make use of modern technology to help ease the pain. Transferring document copies to your accountant electronically reduces the possible loss of receipts, while the ability to produce invoices right at the customer’s premises on completion of the service can send information directly into your accounting records. Speak to professional advisors such as an accountant or tax professional to help ensure you follow the necessary accounting and tax rules. The benefits to your business will usually outweigh the cost.

Sobel and Company, Professional Corporation is focused on business owners of small- to mid-sized companies, as well as large corporations, who are looking for financial acumen and strategic business expertise over and above traditional chartered professional accountant services.

Reach the author of this piece at mahyar@sobelandco.com