Managing finances for subcontracting businesses or subcontractors can be a challenging task. Often, subcontractors end up getting stuck in a pool of cash flow problems that leave them unaware of where their money is going.
It is vital to stay on top of these things to manage your cash flow efficiently. Let's start by learning more about the importance of managing subcontracting finances and how it can impact your earnings.
Why is Managing Finances Important for Subcontracting?
One of the main things about managing finances for subcontractors is to know about financial statements. They must be able to read and determine cash flow statements to have a better idea about the inflow and outflows of the cash in their business.
Cash flow management is the process of monitoring the cash flow statements of your construction company and executing decisions that increase cash inflow while simultaneously lowering or postponing cash outflow. If you are a subcontractor, you need to know some key things about cash flow management.
Basics include managing, handling, sending, and receiving invoices from customers and suppliers. In addition, you must also know your way around some of the other basic financial statements, such as income statements and balance sheets.
However, one of the most important things when it comes to making sense of your subcontracting finances is identifying the main areas that are causing the cash-out flows to increase. Let's look at some things that affect your subcontracting finances.
Factors That Affect the Subcontracting Finances
A lot of things can contribute towards disrupting your subcontracting finances. These factors can increase your outflows and leave you to face a liquidity crisis. Here are some common problems many subcontractors face with the cash flow.
Using Cash for Non-current Assets
Among all the reasons, the top factor that leads to cash flow difficulties for subcontractor businesses is using cash for no-current assets. These assets are long-term assets, such as equipment, machinery, etc. However, it is worthwhile to note that these can drain your finances quickly if you buy them using cash.
Non-current assets are usually expensive since they have a long life. So, if you want to buy these assets, you must use financing options like a long-term loan to finance your purchase. Until and unless you are getting a hefty discount on these items, it is wise to purchase them using leasing options.
Slowing Invoicing Customers
The majority of the customers won't come to you to pay money. You won't get your payment from them until you invoice them from the moment they owe you money. So, if you are late at invoicing them, you will get your payments after the due date.
The gap between the invoicing period means that you have to turn to loans to bridge the gap. It can increase the debt burden of your finances, making it more difficult for you to make sense of your finances.
Maintaining a Large Work Force
Having a large work force can be a problem for many subcontracting companies. Even subcontractors who have a team can face difficulty in managing their finances due to their labor. Paying your workers on a monthly or a weekly basis can impact your cash outflows.
You have to keep a provision for them even if you don't get payments from your clients. As a result, it can impact your cash flows and put a burden on your finances.
Making Payments Early
Another factor affecting the subcontractors' finances is the payments that they make before having an adequate amount of money in hand. Paying up a bill or making a payment to a supplier before having sufficient cash in your hand can disrupt your finances.
Although it is a good thing not to delay your payments for expenditures, it's optimal to wait for the right time. Once you get enough payments cleared from your accounts receivable, you can proceed to clear out your account payables.
How to Manage and Make Sense of your Subcontracting Finances?
As a subcontractor or a subcontracting business, you might have a lot of things coming your way. In the middle of that, managing your finances and cash flow can be a bit difficult. Nevertheless, with the right strategies, you can manage the inflows and outflows of your business in no time.
Promptly Invoice Your Customers
The first and the most important thing you need to do is make sure you get your payments on time. It will give you enough funds in hand to deal with any unforeseen expenses and enable you to run your business operations smoothly and efficiently.
Ensure your Bill the Right Amount
Another thing that you need to avoid doing is under billing or overbilling your customers. Both cases can have a significant impact on your subcontracting finances. Overbilling will give you cash upfront but not for later. On the other hand, under billing will leave you only to cover your expenses.
Finance your Purchase of Non-current Assets
If you want to stay on top of your finance, then you need to have an adequate amount of your funds in hand. And that won't be possible if you purchase equipment and machinery in cash. So, you can look for the best financing option available to facilitate your expenditure.
In this modern era, you have an application and software for everything. So, why don't you use technology for managing your subcontracting finances? There are so many options available for you to choose from regarding cash flow management. You can select any one as per your needs and preferences.
Take the Services of an Accountant
If you feel managing and sorting subcontracting financing is not your cup of tea, you can always get an accountant to have a closer look at it. The accounting professionals can help you identify areas where you are spending more money than necessary.
Managing and sorting subcontracting finances is a simple task if you use the right ways. The factors mentioned above are only the few that affect your outflows adversely.
So, if you want to make sense of your cash flow statement and subcontracting finances, you can apply the ways above to avoid any liquidity problems.
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