It is crucial for all electrical contracting businesses to manage their cash flow properly to forecast the in and outflow of money from your business ahead of time.
Even in good times, it can be challenging to strike a balance between customers paying their bills and sourcing the funds to pay your supplier bills. It is even more critical to have a clear picture of your cash flow in tough times.
Cash flow is like a picture of your business's bank account over a period of time. If your cash flow is positive, you have more money coming in than going, meaning that you have sufficient funds to pay all of your bills, your team, and yourself. If the opposite is true, and you have more money going out than coming in, your bank account will eventually become overdrawn, and you will need to source extra money to cover the difference.
To help better manage your cash flow, follow these six tips.
1. Monitor your cash flow regularly
It is imperative that you keep your bookkeeping up to date to have an accurate picture of your company's cash flow.
You need to make sure your accounts are reconciled every month. All of your expenses should also be recorded and categorized properly to see your actual cash outflow and whether you have sufficient cash flowing into your business to pay your expenses.
Monitoring your cash flow allows you to identify potential cash flow issues ahead of time. This gives you the ability to consider ways to improve your cash flow, such as focusing on collecting outstanding payments, reducing your expenses, or perhaps increasing your prices.
It also allows you to see how much capital you have on hand to reinvest in growth activities like marketing or purchasing better equipment.
2. Forecast your cash flow
A cash flow forecast estimates the upcoming revenue and expenses that you expect to occur during a specific time period. This can be over a period of a month, a quarter, or an entire year. Forecasting your cash flow will allow you to plan for slower months ahead of time and give you the ability to look for ways to reduce your costs.
Comparing your projections with your actual cash flow can help you improve the accuracy of these projections and can help identify long-term patterns and cycles. With each new projection, seasonal changes in revenue, patterns that contribute to late payments, and opportunities to cut costs will all become more apparent.
3. Invoice on a timely basis
Once your team is done working on a job, you should send the invoice to your customer right away. If you use cloud-based accounting software, you should be able to create and send out these invoices electronically while you're on the go.
Don't wait to send out physical invoices; this process takes too long and is extremely inefficient. The faster your customers receive your invoices, the faster they will pay.
Ensure that your invoices clearly outline the services provided, the amount due, the payment due date, and the requested payment methods. Most cloud-based accounting software will generate digital invoices that include direct links to the various payment platforms that your business accepts.
4. Get paid faster using pre-authorized debit
Ideally, you want to provide customers with as many payment options as possible. Some customers may choose to pay in cash, but this will be difficult for most people, especially with pricier projects.
Pre-authorized debit is a great way to help you manage your cash flow. It gives you the option to schedule payments to be automatically withdrawn from your customer's bank account instead of waiting for them to pay you.
Credit cards tend to take a cut of your profits for the processing fee, and cheques can take a considerable amount of time to arrive. If you want to increase your cash flow and reduce your accounts receivables, pre-authorized debit is the way to go.
5. Automate payment reminders
Late payments are going to happen. Your customers may misplace an invoice or simply forget to pay. When your money is tied up in accounts receivable, it can hurt your cash flow. You need to get these funds as quickly as possible to pay your payroll obligations and purchase supplies.
One way to overcome these late payments is to send payment reminders. Many accounting software programs like QuickBooks Online will allow you to send a payment reminder to your customers a few days before the due date and again, a few days after. This process can be fully automated, meaning you don’t have to spend your time doing it manually.
6. Review your expenses
When you monitor your cash flow regularly, you can easily identify how much cash is flowing out of your business. If you see more money flowing out than in, it's time to take a close look at your expenses and find ways to eliminate unnecessary expenses.
Overhead costs like internet, phone plans, subscriptions, and insurance are often overlooked because they tend to be recurring. Every year, you should shop around to see if you are getting the best possible prices and cancel any outdated subscriptions that you are no longer using.
Managing your cash flow can go a long way towards setting your business up for success. You will be better able to work through slower periods and ensure that you always have the funds on hand to pay your employees and all of the other obligations that go along with running your business.
Contact Enkel today to find out more information on managing your cash flow. Our team of experts can help you keep your bookkeeping in order and can help you ensure that you have full visibility on your electrical contracting business’ cash flow.