The COVID-19 pandemic has caused significant changes to the construction industry and has forced them to reevaluate many factors affecting their businesses. Making cash flow strategies a priority is something every construction or contractor company owner needs to keep in the forefront of their mind. With the potential loss of work, change in timing for contracts, and fewer bid opportunities available, many companies have begun to experience tighter cash flow. Below we discuss three strategies that will help prioritize and improve cash flow in your construction business.
Construction Industry Cash Flow Strategies
1. Renegotiate Terms
a. Banks
We recommend renegotiating the terms of your line of credit agreements or other long-term debt agreements. Interest rates have dropped significantly in 2020. If you have a minimum interest rate on any variable debt agreements, it may be an excellent time to review and renew.
Helpful Tips:
i. Go into the renegotiations with a plan.
ii. Do not be afraid to ask for a fee reduction.
iii. Make the banker aware that you are monitoring the fees and will continue to do so.
iv. Consider extending the length of your renewals. Many bankers prefer to freeze pricing for 3-5 years as it is less likely for the client to switch banks.
b. Vendors
Renegotiate terms with your vendors, but do not only focus on price. We recommend negotiating a discount related to early payments, requesting extended payment terms, or paying with a credit card. These may help improve cash flow while maintaining a positive relationship with key vendors.
2. Accelerate Receipts & Defer Payments
a. Accelerate Receipts
Bill early and often, as the contract terms allow. The sooner you can get invoices out, the sooner you are likely to receive payment. This includes timely billing and tracking retention. The collection of retention receivables is often not seen as a priority, as many take the “we will get paid when they get paid” approach. However, making retention a priority and taking the time to follow-up with outstanding balances can significantly improve cash flow.
Helpful Tips:
i. Ask for payment when invoices become due.
ii. Do not allow unpaid invoices to accumulate and grow old.
iii. Consider adopting new policies and letting your clients know about it.
iv. Examples:
- All invoices are due on receipt or charge a penalty.
- Interest for invoices that are unpaid within 30 days.
- Discontinue work on a project if payment is not received within 60-90 days.
b. Defer Payments
Consider asking vendors if they would allow your construction company to defer payments until a later date. Review your upcoming expenses and determine whether these items are required considering the current pandemic environment. Items such as capital expenditures could be delayed.
Review your insurance policies, phone plans, health care plans, and any other plans to try to find savings, especially if you have not done so recently.
3. Bring in New Money
a. Excess Inventory
Improved inventory management is an easy way to increase cash flow. Liquidate excess or slow-moving inventory by finding a single large bulk purchaser or asking the distributor you originally purchased from to repurchase it all. Although you will likely be charged a fee to do so, this removes the inventory and can improve cash flow.
Construction industry companies should reevaluate how much inventory needs to be kept in stock. Reducing the overall value in inventory may result in a simple improvement in cash flow.
b. Sell Assets
Review your listing of fixed assets to determine if any non-productive assets can be sold. These could be old items that have not been used for a while, or items no longer being used due to the pandemic’s reduced workload.
c. Investors
Consider bringing in new investors to help with cash flow needs. Although bringing on new investors may take a lot of time and effort, it is a way to bring an influx of cash into the business. This may be an excellent time to consider succession planning for your construction company, and you may consider offering key employees the opportunity to purchase ownership.
Another way to bring in investment is through loans from the owners. This can be done through low interest and low-risk loans which can be paid back once business returns to normal. Loans from ownership may be required to be subordinated to any banks debt. However, this can be negotiated with your bank.
Now What?
The construction industry should be reevaluating their cash flow and formulating a plan to get business back in operation. This process starts with a cash flow analysis. The above recommendations have only skimmed the surface of what construction companies can do to manage their cash flow.
Smith Schafer professionals can help. Our Construction & Real Estate Group, comprised of numerous professionals, is committed to serving over 800 Minnesota construction and real estate entities. From large construction companies to specialty contractors, we have the experience to bring you innovative solutions.
