Ensuring sufficient working capital for your construction company can be tricky. As a business owner, you know there are multiple challenges you may face on a regular basis that threaten the financial health of your company. Some of these challenges are unavoidable. Some, however, can be greatly mitigated with better systems, policies, and procedures.
If your construction company struggles to secure enough working capital, it is often due to one of the following three common challenges:
- Consistent Cash Flow
- Improper contract terms
If you’re struggling with any of these issues in your business, read on to learn more about how they directly impact your ability to maintain sufficient working capital and how you can solve them to create greater wealth in your business.
1. The Challenge: Mismanagement of Working Capital
With multiple projects and different pay rates and timelines, it can be easy to lose track of the amount of working capital you have at any given time. Mismanagement in this context has little to do with competency and more to do with organization and meticulous attention to detail. Without this very careful monitoring of your financial situation, you risk losing out on new contracts due to the inability to invest upfront. You may also find yourself in a position where you must downsize in order to cover expenses – not good for a growth-minded construction company.
The Solution: Better Monitoring and Reduced Spending
Solving a mismanagement problem includes both better monitoring and reduced spending. It’s imperative to keep impeccable records of your finances, which becomes much easier when you’ve essentialized your business expenditures. The less you spend, the less you have to keep track of, and the more working capital you’ll naturally have as a result.
This is not to say you should focus on cutting costs wherever possible to the detriment of your company’s growth. Quite the opposite. Where are you currently spending that you don’t need to be, or where can you spend differently to produce the same or a better result? Forecasting your spending can also help you maintain a healthy working capital, especially when done in conjunction with moves made to increase cash flow.
2. The Challenge: Maintaining Cash Flow
Your company experiences regular cash flow problems due to late payments, high payroll and overhead burdens, project delays, or any number of other factors. Lack of incoming cash puts your company in a difficult position, making it impossible to take on new projects due to the large upfront costs. This ultimately slows your company’s growth. Without solving this problem, your company will stall out and ultimately will not be able to survive as debt burdens pile up.
The Solution: Invoice Factoring Services
Invoice factoring services are a great way to ensure that you can keep cash flow coming. Once you partner with an invoice factoring company, they pay the majority of your unpaid invoices upfront, then pay you the rest (minus a fee) once they get paid by the client. You can continue to grow your company, pay your bills and employees, and invest in new equipment and technology without fear that you’ll run out of cash. It’s easier to qualify for than a bank loan and comes without an additional debt burden, as the cash you receive is the cash you’re already owed.
3. The Challenge: Improper Contract Terms
It’s tempting to compromise on your contract terms in order to secure a big project. However, agreement to certain terms can adversely affect your business and can turn that initially exciting new project into a major burden. An example of this is to agree to terms that require a large initial investment from you, but your payday comes as one lump sum 60 days after project completion. Even if the dollar amount is high, terms like these may put you at a disadvantage overall, as you will drain your working capital and will not be able to take on other projects.
The Solution: Know Your Non-Negotiables and Stick to Them
Every contract is likely to be somewhat different, but you should never compromise on points you know will hurt your business. Go into every contract negotiation clear on what you need and what you can and cannot do. This should allow you to find a win-win solution for both you and the client. If you can’t, think about whether or not that client is the right fit for your business. New projects are important to the growth of any company, but not if they cause more harm than good.