The contracts kept rolling in.
Bob had a knack for sales and his subcontracting business has been booming, signing new deals left and right.
But even as the contracts kept rolling in, so did the bills – from his employees, from his vendors, and from his suppliers. He pays these bills quickly (his employees aren’t going to wait around to be paid, not in this market), and expects that the invoices he sends out gets the same treatment – but they don’t. Bob doesn’t realize that the wait time for payments in Construction is 83 days on average, the longest of any industry in the world, according to PwC (many payments take even longer).
Bob keeps winning business, but every morning when he refreshes the company’s bank account balance, it is lower and lower. He begins to worry – he has placed everything he had into this business. Maybe if he just holds on for one more month, things will improve and the customer payments will start rolling in – he starts putting down company expenses on his credit card, soon maxing it out. The banks at this point won’t touch Bob’s business. As the old adage goes, banks only lend money to people who don’t need it.
Finally, the rent bill comes due – it is the one that breaks the camel’s back. Bob is forced to declare bankruptcy, let go of all his people and close shop, despite being really good at what he does and generating revenue.
There is no shortage of people like Bob – the graveyard of companies is littered with profitable businesses who did not properly account for their cash flows, leading to a cash crunch. Even if it doesn’t lead to bankruptcy and ruin like in Bob’s case, a low cash balance could hobble your business and hamper the growth and future profits of the company.
Let’s take a closer look at Bob’s financials:
Bob only takes one type of job. For each job the company invoices $60,000 over 3 months, but the company spends:
- $30,000 in month 1
- $15,000 in month 2
- $5,000 in month 3
That’s $10,000 in profit per job. Bob landed one contract in the first month, two in the third month, three in the fifth month, and four in the seventh month. He started out with $200,000. Bob is a typical subcontractor, and it takes three months after the invoice gets sent out before he gets paid. Revenue per month for each job is simple at $20,000, but the cash position tells a different story:
Despite doing quite well, Bob’s checkbook is negative from Month 5 to Month 9, being as much as $140,000 in the red! There is no way Bob could have held off all their creditors for that long, so the only thing he could do is either look for expensive financing, dig deeper into his pockets, take less jobs, or close down altogether.
With Constrafor, there is a better way.
Constrafor’s Early Pay Program allows subcontractors to get paid in days rather than months (after client approval) for a transparent, up-front fee. Has Bob used the Early Pay Program for all his jobs, his cash situation would instead look like this:
Bob’s bank account now never dips below $0, which allows him to continue operations as normal. Had Bob not used the Early Pay Program and decided to just take less jobs instead, he still would have missed out on one job in Month 5 and three jobs in Month 7, which means he lost out on $40,000 worth in profits! In addition, Bob’s company would have other types of losses: potential business expansion opportunities, connections, and momentum. This chart illustrates the benefit of Constrafor’s Early Pay Program compared to not taking Early Pay and taking less business instead:
The moral of the story is this: Don’t be like Bob.
Contact Constrafor today and ask about our Early Pay Program, and how it can allow your company to maintain its pace of growth and improve its cash flow position by solving one of the largest problems in construction – payment delays. In addition to the Early Pay Program, Constrafor also provides a cloud-based, easy-to-use platform where subcontractors and general contractors alike can manage their invoices, COIs, diversity filings, and much more, which can help your firm become more efficient and reduce the likelihood of clerical errors.
Sign up and try Constrafor for free today!