Cash flow is top-of-mind for subcontractors in 2022 as they face new compliance and related requirements, rising insurance premiums, the persistent health crisis and supply chain disruptions to go along with familiar payment delay issues.
According to construction finance expert Steven Goldstein’s analysis of the latest industry trends, those that are able to address these challenges and maintain a strong cash flow, likely with varying support from financial programs and technology, have the best opportunity to drive productivity and growth.
Here are four top areas of concern and consideration in these difficult times to ensure your cash flow is strong in 2022:
#1 Time to Review and Rethink: In these challenging times, it’s important to review existing cash flow programs, whether line of credit, credit card or other financing option—and look ahead. Are you getting a competitive interest rate? Are you effectively using your credit card cash back program? Are you able to track in real-time price impacts on materials? If nearing the end of a project, can you reduce retainage? Have you considered invoice financing? Perhaps getting paid in two weeks versus 90 days could help, and the underwriting is so much less invasive than trying to get additional financing. During that review, share status and concerns with strategic partners, like banks, surety and insurance brokers and accountants. Evaluate the processes that are in place for project management. Assess controls, inventory and policies. Many successful contractors rely on a vendor check guideline to help manage cash flow projections.
#2 Consider Retainage Adjustment: This is a good time to review retainage policies contracts. If contract retainage is 10%, perhaps it’s time to talk with the general contractor about reducing that retainage if the project is nearing completion. Reducing retainage is a great way to advance cashflow.
#3 Get Ready for Insurance Renewals: The insurance industry has been in a hard market for some time, with rising prices for general liability, umbrella policies, builder’s risk, etc. Renewals can be expensive and hit cash flows hard. Talk to insurance carriers well in advance, two to three months ahead of a renewal date, to understand potential premiums and to understand exactly what information will be needed to renew. Many carriers are asking for more than financial data.
#4 Gauge Your Regulatory Readiness: The new ASC 842 operating lease accounting standards became effective on January 1, 2022. A non-union contractor that has significant leased equipment could be affected by this standard. According to the new rules, operating leases must be capitalized as an asset and documented as a liability on the balance sheet—directly impacting financial statements. Reach out to CPAs early on to determine the impact.
Whether reviewing cash flow programs and retainage, insurance renewals or regulatory changes, a common factor in every instance is having accurate, current data. Effectively evaluating your cash flow is only possible with good data and analytics.
Contractors typically face cash flow issues when they have inaccurate data and a lack of access to timely reports. Ensure sure you have the tools needed to compile real-time data and track money going in and out. Can your operations team seamlessly communicate with your financial and accounting team? Can you instantly tally direct and indirect expenses by project? Can you track estimated versus actual, and do you have the workflows in place to adjust accordingly? It’s one thing to estimate those expenses, quite another to know the true gross profit on a project.
WATCH THE WEBINAR
For more trends and challenges related to cash flow, such as the importance of succession planning and the significance of wearables and robots, listen to the live webinar with financial and construction industry expert, Steven Goldstein. The ‘fireside’ chat style interview with Steven will also identify how subcontractors can address these challenges and how they can take advantage of new technologies and financial programs.