June 9, 2020

Cash Flow Strategies for Contractors During COVID-19 Disruptions

As the COVID-19 emergency measures phase-out and the state continues to reopen, contractors and construction companies are looking to position themselves for the future. While there are many considerations that need to be made to comply with state and local guidelines, management is also spending time reviewing cash flow strategies. Ensuring best practices are followed is essential to ensuring the financial health of the company. It may seem counterintuitive, but cash flow management should be consistent whether the market is booming or plummeting. A consistent, conservative cash flow approach will serve the company well in both good and bad times. Although best practices should not change, it is important to be reminded of key strategies that can be particularly helpful when operations are interrupted. To help clients, prospects, and others, Wilson Lewis has provided a summary of these strategies below.

Be Dynamic

Projecting future cash flows may be difficult right now but it is not a cause for concern. Businesses do not have to have all the answers. A good place to start is to adopt a dynamic cash flow model that allows for scenario planning. It is important to have the option to change a single or several variables to review the potential impact in real time. If variables can be changed to align with current business reports it will result in a more reliable cash flow estimate.

A dynamic cash flow model will also allow businesses to run “what if” scenarios that executives can use to make long-term decisions. Run best-case and worst-case scenarios (and everything in between) to better grasp where financials could end up this time next year. Although the stock market has fully recovered, the economy has not, and many businesses are still facing state-sanctioned shut downs and decreased investments that will impact their companies for months or even years. Knowledge is power, and when armed with reliable knowledge from a dynamic financial projection, contractors can better prepare for what is to come.

Go Cashless

Accepting electronic payments may seem simple, but it can help in a few ways.

• First, cashless payments are easy ways to limit exposure to the virus. The healthier staff is the less disruptions will be faced by the business.
• Second, cashless payments give access to cash faster. Invoicing, waiting for a check to be mailed, depositing that check, and waiting for the check to clear can take days – even weeks. If customers can pay electronically, the sooner it is available to invest in new projects or pay down debt.
• And third, it adds credibility to the organization. Customers will be pleased the business is up to date with payment norms, and foregoing paper checks will eliminate opportunities for check fraud and stolen account information.

Stay Current on Billing

To shorten the cash conversion cycle, it may be necessary to adjust your payment policies. If invoices state that interest-free payments are accepted within 90 days, customers will not be incentivized to pay early. Consider changing policies to net-60 or offering incentives for early payment. Do some digging to see what others in the industry are doing, but do not be afraid to make new changes in the process. It is best to avoid carrying customers’ debts for any longer than is absolutely necessary

Also consider automating invoice creation. If your accounting system is sophisticated enough, generate an invoice every four weeks or after a certain event (like meeting a project goal) takes place. If workers are billing WIP regularly, these invoices will report steady labor numbers and payments will come that much faster.

Once invoices are issued it is important to closely monitor collection. Accounting systems can generate past-due notices, or the accounting staff can look through the system and manually flag outstanding invoices as part of their month-end process.

Adopt New Tax Strategies

Pay attention to new tax strategies and adopt the ones that make sense for the business. It is possible to uncover new tax credits and deductions, and it may even be able possible to defer tax payments. Tax deferral strategies, like electing bonus depreciation, can be great lifesavers when cash is short at hand.

Thanks to the coronavirus, saving tax dollars is more important than ever, and fortunately, Congress has passed many pro-taxpayer tax laws in the last three years that can help business owners defer taxes. The Tax Cuts and Jobs Act (TCJA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act are two of the most influential tax law changes of our time. To stay current on laws like these and talk to a tax advisor, to ensure these benefits are being properly leveraged.

Contact Us

Atlanta contractors should always prioritize cash, but it is especially important when markets take a turn. As we have seen these past few months, there is no way to predict future revenue streams with certainty, so your business needs to be prepared for anything. If you would like to discuss your current tax flow strategies or need assistance with another issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.