If you’re going to run a successful contractor business, you need to create a cash flow budget within your company. Unfortunately, the majority of contractors don’t do that.
Here’s what we hear:
“I don’t want to.”
“I don’t know how.”
“It’s going to be too hard.”
“I don’t have enough time.”
When the seasons change, though, or business gets tight, you’re going to wish you’d taken the time to establish a cash flow budget back then.
If you want to protect the future of your business, or grow your business, then you have to create a cash flow budget.
If you’ve ever said any of the excuses above, then you’re in luck. Today, we’re going to teach you how to create a cash flow budget.
Cash Flow: the True Measure of Success
Today, lots of companies look at their profit and loss (P&L) statements to gauge how well their business is doing. If they’re in the green, things are good. Red, meanwhile, means it’s time to drum up some new business.
While profit and loss statements are certainly an essential part of accounting, they don’t tell the whole story. In fact, your P&L can — and will — lie to you and tell you the company is making money, even when you’re not. If you keep going like this, your business is bound to struggle.
So, what’s the answer?
Welcome to the importance of cash flow.
More reliable than those P&L statements, cash flow is the metric that demonstrates how well your company is truly doing, and where your contractor business is (or is not) growing.
What Your P&L Won’t Tell You
The primary issue with P&L statements is what they don’t show you. These things include equipment purchase cost and loan payment numbers.
Equipment purchase cost. Depreciation is an accounting number that relates to how much you pay for a piece of equipment and how much the value of that asset has reduced since you first purchased it. Equipment purchase cost, on the other hand, is a cash flow metric, since your company must spend money to replace said assets. While depreciation doesn’t have a direct impact on your cash flow, equipment purchase cost does.
Loan payment numbers. P&L statements only show you how much interest you’re paying on your business loans — not the principal payment amount. This means you could be under-reporting the expenses associated with running your company.
In addition to giving you a clear picture of your company’s finances, establishing an accurate track record of your flush seasons allows you to predict what next year, and next month, will look like. This is good because it can help you plan ahead.
4 Tips to Develop a Cash Flow Budget
Now that we’ve discussed why creating a cash flow budget is so important, let’s talk about how to make it happen. Here are a few critical steps:
Predict your collections. What do you anticipate bringing in as revenue, and when? Be realistic about this. If a June invoice is September revenue, thanks to your net-60 payment terms, be sure to account for this.
Predict other cash to enter your accounts. Are you anticipating client deposits, proceeds from partnerships, or income from equity-based transactions? Account for these, too.
Detail expenses. The easiest way to do this is to look at your costs from the last year, month, or quarter. Start with standard expenses, like insurance, loan payments, rent, and payroll.
Evaluate accounts payable. Using the same period (month, quarter, or year), evaluate your accounts payable. What are the due dates for each account, and when will you pay those expenses?
We Can Help You Grow Your Contractor Business
Once you’ve got this information gathered, you’re ready to begin compiling a cash flow budget. Don’t go it alone, though. At Grandy & Associates, we know just what it takes to run a profitable contracting business. We provide business training exclusively to the service and trades industry.
Contact us today and find out how we can teach you to grow your contractor business.