Turning Profit into Cash: Strategies for Contractors

Minding Your Money Tree

When money trees are small, they are easy to care for with a watering can. As they mature, it will be easier to use a garden hose. Then comes the time when watering the money tree requires a full-blown irrigation system that accounts for correct timing, accurate measurements, and appropriate filtering mechanisms. 

The same is true for many whose “money tree” is the construction business they own. They typically start out small, watering by hand, and then graduate to a hose, only to find that they need to incorporate practical strategies for watering their growing tree.  

Turning Profit into Cash

There are several practical strategies that contractors can use to turn profit into cash. Paying attention to what comes in and to what goes out allows for the management of payables in sync with receivables.

Enhance Incoming Funds

Turning profit into cash involves accelerating incoming funds by managing Accounts Receivable effectively and implementing efficient invoicing procedures. Think of it as having faster billing and improved collection practices.

Four methods used to help speed up Accounts Receivable are:

1. Send invoices promptly. 

2. Offer incentives for early payments.

3. Have clear credit policies and penalties for late payments.

4. Use technology to automate invoice generation, delivery, and collection. 

Pro Tip: Focus on customers that generate the fastest cash conversion cycle.

Manage Cash Outflows

Turning profit into cash also involves being disciplined concerning how cash is spent and when. Here are five things savvy construction contractors do to improve how they manage cash outflows.

1. Eliminate or reduce retainage – try to negotiate a lower percentage or ask the owner or GC to phase out retainage over the course of the project.

2. Manage change orders – Ensure that your contracts clearly establish terms and procedures for approving and paying change orders. (Be sure to submit the necessary documentation and bill for change orders in a timely and accurate manner.)

3. Work with vendors and suppliers – ask for discounts or more favorable terms, or request the ability to spread out payables by arranging staggered payment dates. (Don’t pay vendors earlier than required unless you’ll receive a discount for doing so.)

4. Set aside cash reserves – on a regular and planned basis, utilize the envelope-style cash management tool. 

5. Check for leaks – Identify and eliminate "cash leaks" from waste, inefficiency, and unchecked spending.

Pro Tip: Consider both long- and short-term options (i.e, renting vs purchasing equipment) before making final decisions.

Other Considerations

Turning profit into cash may involve some ingenuity or cleverness – what some people call “thinking outside the box.”  Or it may simply be a matter of using common sense and determining what is best for this time and place. 

Here are three additional considerations that may help achieve the goal of turning profit into cash.

1. Boosting Productivity – Streamlining those all-important internal processes can improve efficiency and free up cash. 

2. Implementing efficient inventory management – Involving the use of just-in-time systems, forecasting to anticipate demand, and taking advantage of inventory management software.

3. Selling Unused Assets – Converting underutilized or obsolete equipment and other assets into cash. 

Pro Tip: Ask your accounting and advisory team for ways to enhance your ability to turn profit into cash. (Okay, so that was a blatant plug for The Profit Constructors; I couldn’t help myself.) 🤷‍♀️

Ambitious Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:

• Clients and customers

• Employees and subcontractors

• Vendors and service providers

• Governmental entities 

Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:

• Remain informed

• Avoid hassles

• Reduce risks

• Be future-ready

Ready for action? Or want to know more? Get in touch today to schedule a complimentary discovery call. 866-629-7735