Let’s talk for a minute about the life blood of a small contracting firm. It’s the people I employ, you might say. It’s the equipment and how we maintain it, others may say. For some, it’s the jobs in the pipeline and how quickly they get done and turned into revenue.
All of those things are true. And all of them are most true and real when reflected on a business’ cash flow statement. Accounting? Numbers? Many readers turn the page when I talk about the nitty-gritty of running a business. But cash flow is critical.
Want to pay those people you employ? Need to do proactive maintenance on that half-million-dollar rig? Need to buy consumables like bits to take to that next job in the pipeline? All of these things depend on a business’ cash flow. An anemic cash flow puts a business on its back, and recovery for a small company isn’t always easy.
What is Cash Flow?
Cash flow might sound like a tough concept, but it’s just what it sounds like: the flow of cash through a business over a given period. Often, that period is a month, so let’s use that as an example. Add up all of the revenue incurred during a month. Subtract all of the expenses incurred during the same month. If the number you get is greater than or equal to $1, congratulations! You’re cash flow positive. If the number is less than zero, you’re cash flow negative. The world doesn’t end for companies with a negative cash flow over one month, but a negative cash flow over time can prove a big problem.
A Positive Attitude
Having consistent positive cash flow means options. Businesses with good cash flow can make decisions from a stronger position. Good cash flow means the money spent to make money earns its keep. It means invoices booked during a month add up to more than wages, materials, utilities, gas, insurance and a list of other expenses. It means the bank account finishes the month with more than it started.
Spending more than a business makes in any given month doesn’t typically mean problems. In fact, it can mean good things. Maybe a three-month project is front-loaded with materials expenses. The business goes negative in the first month, knowing that invoicing will catch up and everything will even out over time. Still, this evening out depends on cash reserves in the bank or bridge loans to make up the difference. Without funds to backstop negative months, a business’ life blood bleeds out over time.
Cash flow ebbs and flows through a business — that’s just what it does. An up month follows a down month follows and up month, and so on. Successful businesses find ways to even out cash flow so highs are less high and lows are less low. Dependable forecasts for both cash coming in and cash going out ultimately make a business healthier. So, how do you get even? Here are a few tips.
- Invoice consistently: Cash flow prefers invoicing as jobs get finished. Consider also a discount for early payment. For example, an invoice could be net 30 (payable within 30 days), or 2/10 net 30, meaning it’s payable within 30 days, but the customer gets a 2 percent discount if paid within 10 days.
- Reduce overhead: Businesspeople generally have cutting expenses woven into their DNA. Consistency, however, isn’t always considered here. It should be. If, for example, an annual insurance payment always lands in February, it’s better for cash flow to work out smaller monthly payments.
- Choose customers, vendors and subcontractors wisely: As a contractor, it’s tempting to take on any paying customer. Resist. Low-margin customers make more trouble than revenue. If possible, shop vendors regularly to get the best prices and flexible terms. If you use subs, use ones that do their part right the first time. The last thing you want is to re-do work a sub gumped up.
What do you think? Has your business been burned by an unforeseen cash flow crunch? Or have you, your customers, your vendors and your accountant built a bullet-proof cash flow machine? Tell us your thoughts. Send an email to firstname.lastname@example.org.
Stay safe out there, drillers.