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Restoration contractors can spend a lot of time waiting for payment. Even though the insurance company isn’t your customer, the property owner may be depending on that insurance check to pay for your work. Meanwhile, you’re incurring expenses that drain your bank account, like purchasing materials and paying employees. To cover these expenses, restoration contractors need to manage their cash flow to ensure they have enough money in the bank — especially when the insurance company is dragging their feet.
Poor cash flow management is the number one reason why construction businesses fail. If you don’t have enough money to pay your expenses, your company won’t last long. Keep reading to learn five tips restoration contractors can use to effectively manage their cash flow while the homeowner waits for an insurance check.
5 tips to manage cash flow on a restoration project
Planning for your cash needs helps you know when to seek help. Luckily, contractors have several tools available to help them predict periods of low cash flow – and protect their bottom line.
1. Plan out your cash flow
The money coming in and out of your company is called cash flow. It’s similar to your wallet. You may invoice customers or receive bills from vendors, but the money doesn’t hit your wallet until you get paid or send a check.
A cash flow statement is an analysis of incoming and outgoing cash for a certain time period (usually one month). When the report is used to predict future cash flow, it’s called a cash flow projection.
Each project you work on has expenses that need to be paid and income that will be received. You can plan when the expenses will be incurred and when the payment is expected to be received. In this way, you can determine how much cash you will need to pay the expenses and when those payments will be due.
This allows you to plan ahead to ensure that you have the cash on hand that you need.
2. Set expectations with your customer
In most cases, a restoration contractor will be paid by the property owner’s insurance company for the work they’ve performed. However, if the insurance company doesn’t pay, denies the claim, or adjusts it down, then the property owner is responsible for paying for the restoration work.
Contractors need to ensure that owners know that they are financially responsible for mitigation and restoration costs. This should be clearly stated in your contract.
Owners should also know when payments are due for their project. Be sure to go over payment terms with them when discussing the contract, so they can plan ahead.
3. Finance job costs for longer payment cycles
Since most job costs will be incurred before you receive payment, it’s possible that you won’t have enough cash on hand to cover those expenses, like payroll and materials purchases. Financing options allow contractors to extend repayment of those costs, giving you more time to collect from the owner or insurance company.
Trade credit allows you to purchase materials and delay paying for them, usually for up to 30 days. Material vendors often provide this type of free financing in order to attract customers.
Material financing gives you even longer payment cycles, allowing you to delay payment for up to 120 days. The material financing company pays your supplier directly for the materials you need. Later, you pay the financing company what you owe. This special financing gives contractors the longest time to pay their vendors.
Depending on the size and scope of the restoration project, you may be able to qualify for mobilization financing. This financing covers labor costs and materials, and helps contractors defer initial costs on a project.
4. Protect your lien rights
The right to file a mechanics lien is the most powerful tool in your toolbelt. It’s less expensive than filing a lawsuit and is a statutory right in all 50 states.
A mechanics lien allows you to guarantee payment from the owner. It attaches to the deed on the property and forces the owner to pay you before the property can be sold. Restoration contractors have the ability to use mechanics liens to secure payment from property owners.
Each state has its own rules and regulations regarding mechanics liens. You may need to send a preliminary notice at the beginning of each project or send a notice of intent before you file a lien.
Sometimes just sending these notices are enough to get you paid. Become familiar with the lien processes for the states you work in.
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5. Use subcontractors to share the cash burden
Restoration work is often cyclical in nature. There are busy and slow periods, often depending on the weather and other natural phenomena. Maintaining readiness can be difficult, as you don’t want to pay employees when there’s no work.
To supplement your labor force, you can hire subcontractors on an as needed basis. Subcontractors provide you the flexibility to only hire them when needed, so you aren’t racking up costs during slow times.
Subcontracting work also allows you to delay payment. Payments to a subcontractor are typically due much less frequently than payroll. By using a subcontractor, you can defer some of your own risk down the payment chain to them.
No more waiting for payment
Restoration contractors often have to wait for insurance claims to be processed before receiving payment. You need to plan ahead for cash requirements on each project, so you know how much cash you’ll need each month. Restoration contractors can use tools like financing, the mechanics lien process, and subcontractors to delay costs and protect their right to be paid.
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