How To Manage Your Cash Flow As A Contractor?

how to manage cash flow contractor

Being a contractor is great because it has a huge potential to reap whopping monetary rewards and profits. But it also presents its own set of challenges and issues, one being cash flow management. No matter how small or big your contracting business is, cash flow pumps in the lifeblood for it to keep going. Hence, you need to manage your cash flow prudently to avoid wastage and preserve your liquidity status. 

Just like any other business, contracting is fraught with certain risks. As a contractor, you will be a sole trader and have to make major business decisions. Any negligence on your part can lead to hefty losses for your client, supplier or member of the public at large. When that happens, expensive lawsuits become inevitable, something that can completely drain out financial resources. Keeping in mind the likelihood of something wrong happening, you need to have Public Liability Insurance for Sole Traders in place to cover legal fees and compensation costs. Check out Public Liability Australia by clicking here. 

Coming back to cash flow management, there are many ways for contractors to go about it. Let’s discuss some of them here in this article. 

1. Formulate A Cash Flow Projection 

The contracting business deals with a variety of projects at a time, making cash flow projection slightly more difficult to create than any other business. No two projects are the same and there may be unexpected changes in the middle of the job. So, you need to practice more prudence while formulating a cash flow projection. 

Fortunately, there are many cash flow management tools and software that can help you track your income and expenses and come up with a future projection. You can analyse your current cash flow status and anticipate what’s to come based on these data points. This will help you prevent wasteful expenditures and keep the cash flow at a positive mark. 

2. Keep A Tab On Receivables And Payables 

Accounts Receivables and Accounts Payables are two extremely vital components of cash flow management of an independent contractor. To avoid cash flow issues, you need to keep a regular check on these two accounting items. You need to improve the process of turning supplies and materials into actual products, inventory into accounts receivables and accounts receivables into money. To improve receivables, you can offer discounts to clients who make instant payments, ask for an initial deposit, perform credit checks on non-cash clients and issue invoices quickly. 

On the other hand, managing accounts payables will require you to keep your business expenses below the sales you are making. You need to reduce or control costs to keep your cash flow intact. For this, you can invest in resources that lead to long-term savings for your business. Make the best use of creditor payment terms and e-payment methods to pay off creditors when payments become due to them. You also need to make a wise choice of suppliers who can offer discounts or a fair price for supplies. 

3. Improve Vendor Relationships 

Much of your business’s cash flow will depend on the rapport you share with your vendors. For instance, in the case of construction contracting, a good relationship with vendors depends on trust, which can probably help you get the best prices and offers on materials. If your relationship with vendors is based on a contract, try to negotiate the payment schedule and terms to suit your interest. You can consider buying your supplies and materials in larger quantities to get a discount. 

Maintaining good relations with vendors certainly has a positive impact on cash flow management. You will be getting the best prices for materials, meaning you stand a chance to make a whopping amount of savings annually. Not to forget, such vendors will also offer good payment terms, which will ultimately reduce the burden on your finances. 

4. Check Your Payroll 

Believe it or not, a significant chunk of your business’s finances go towards paying your staff and workers. In the construction industry employers often follow a bi-weekly payment routine. To up your cash flow management, you can get in touch with subcontractors, who ask for a monthly payment. Full-time, permanent employees are more likely to give you better results because they can help avoid project setbacks and increase business referrals. 

You also need to keep track of staff hours to give your clients a fair idea of how much time is given to the project. Not doing so often leads to inaccurate estimates and frequent change orders, something that would make it hard for you to meet your client’s expectations. Proper tracking of staff time can improve cash flow management by helping you budget the project more realistically. It would enable you to make necessary adjustments on the basis of how long the work takes, contrary to how long it should take. 

Contractor Cash Conclusion 

Cash flow management can be a tricky business for contractors but the strategies mentioned above can help you in the process. You should also consider hiring a qualified accountant who can keep track of your finances. Although you will have to pay them a fixed salary, it will be worth your time and investment.

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