A key aspect of managing a construction company’s operations and factor in many contractors’ success is the efficient assessment and management of working capital. This article will define working capital, explain why it matters for construction organizations, and provide tips on assessing and enhancing working capital within your organization.
The gap between your company’s current assets and current liabilities is known as working capital. It is a monetary indicator of a business’s capacity to make immediate payments (typically one year or less). You’ve probably thought about your working capital if you’ve ever worried about how you will pay your payments at the end of the month.
Obligatory Documents to Avail Working Capital for Contractors
- KYC Documents
- All principal accounts’ most recent six-month bank statements
- Brief description of the company’s history and promoters’ profiles
- Financial projections for the current year and audited financial statements for the last three fiscal years
- A recent stock statement with a study on aging
- Work order information
- Any additional records that the lender may want
Importance of Working Capital for Contractors
- Huge Project
Consider getting a sizable task that will pay you a 30% net margin after it’s finished. You should seize the opportunity since this is the sort of work that doesn’t come around very frequently.
Good news: Your bid was accepted! However, it will take you six months to finish the work and receive payment due to the project size.
This implies that you must float the cost of your labor, generally payable every one to two weeks, over the following six months while your team is working on this project. You also need to fund your general overhead costs for the six months, as well as the cost of the materials for the work.
Before receiving payment, you will need to make sure you have enough cash on hand to pay for all of these expenses. You will want additional funding if you don’t have any ongoing tasks during these six months; otherwise, you might not be able to accept the position.
- Expanding Rapidly
Think about how you may benefit from being the first to enter a market niche with little competition. You want to take advantage of the excellent margins in this market
Your construction company will require more operating capital than usual to enter this new market. To complete the task, you must hire employees. Additionally, you must buy the tools, resources, and other things required to compete in this market. You won’t be able to make these investments or enter this new industry if you don’t have enough cash.
- Inadequate Return on Assets
When you have extra money that may be used for investments in the business or elsewhere, it’s crucial to evaluate your company’s working capital. When you have a significant portion of your assets invested in cash, inventories, accounts receivable, or other current assets, they can’t be used in areas where they can provide a higher return on investment.
Keeping a check on your working capital becomes crucial not just when levels are low but also when they can be excessively high. Specific corporate structures may be subject to an accumulated earnings tax for failing to distribute this extra revenue to their owners, in addition to generating a low return on existing assets. Accounts receivable frequently require the most excellent care.
Even when clearly outlined credit conditions are in place, specific clients might take advantage of a lenient payment policy due to a lack of attention over time. One of the simplest methods to increase working capital is to reduce accounts receivable by ensuring that customers pay on time.
It would be impossible to operate without any working capital if payments were made immediately and there was no danger to the business. The construction sector is hazardous and characterized by painfully sluggish payouts. To exist, contractors need to have a good quantity of working capital.
Finding out how rapidly your assets and liabilities turnover can help you figure out how much working capital your business requires, as well as if it has enough cash on hand to make up any deficit.
How to Raise Working Capital for Contractors
- Set Up a Credit Line
You may get cash when you need it with a line of credit without paying interest on any amounts that aren’t used.
- Implement Progress Billing
You are only building up liabilities on the task up until the point at which you create an invoice or a payment application for a project. You have less working capital as a result. Using progress billing for all phases of your projects improves cash flow and working capital.
- Finance The Purchase of Your Materials
On new construction projects, the startup and mobilization expenses can quickly deplete money. Contractors are capable of making upfront payments to suppliers because of materials finance.
Financing material purchases allows for flexible payback terms of up to 120 days, freeing up funds that may be utilized to settle other debts without adding to existing debt.
- Ask for an Upfront Payment
Receiving a deposit at the beginning of a project helps to supply the money required to pay employees, purchase supplies, and support other working capital requirements. It is best to begin investing money in a construction project as soon as possible.
This increases your asset balance and lowers the debt load that contractors frequently experience during the initial months of new work.
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