Before the Next Project: Map the Gap Between Payroll and Collections

A new nonresidential project can put crews to work weeks before the first customer payment arrives. Payroll comes due, suppliers need deposits and equipment has to reach the site. Meanwhile, the contractor may still be waiting to submit the first payment application.

Before accepting that job, it helps to put those dates next to each other. Which bills come first? When should the customer payments arrive? And what happens if one of them is two weeks late?

A weekly cash forecast brings that gap into view alongside the company’s existing commitments. The useful number is the lowest cash balance along the way. That is where a promising project can put pressure on the rest of the business.

Start With the Payment Terms

The first question is straightforward: What are the payment terms? A contractor receiving progress payments has a different collection schedule from one that bills only after the work is complete. That distinction also helps determine which financing options may fit if there is a gap.

Receivables financing starts with invoices that a provider is willing to finance. A contractor with unpaid invoices for completed work may have financing options that are unavailable to one preparing to mobilize on a newly awarded contract. Expected revenue from future work is not automatically an eligible receivable.

Progress billing needs a closer look. Some providers accept approved progress billings; others have narrower requirements. The contractor needs to establish which invoices qualify and what approvals or documents are still missing before counting on an advance.

The purpose of the money also changes the discussion. A short gap between paying crews and collecting an invoice may be a reason to consider invoice factoring or a line of credit. Buying equipment, growing the company or getting ready to bid on more jobs calls for a look at the longer-term plan. The financing has to make sense beyond the immediate need for cash.

The Deadline Can Become the Problem

Contractors can leave this conversation too late. By the time they apply, an approaching bill may be doing most of the decision-making.

That is a difficult position. There is less time to compare offers, resolve questions about an invoice or consider a product that takes longer to arrange. A deal may be available quickly and still be a poor fit for the company’s payment schedule.

Having a week or more can give the contractor and financing provider more flexibility to explore options. It does not guarantee approval or better terms. It does give them time to work through the details before the situation becomes an emergency.

The advice is simple: plan, plan, plan. A weekly cash forecast makes that advice practical by showing when the company is likely to need help.

Put Actual Payment Dates on Paper

Start with cash available for operations. Retained earnings record accumulated profits kept in the business, after losses and distributions. Those profits may already have funded equipment or be tied up in receivables, so the accounting balance is not a measure of cash available for payroll. Restricted funds also stay outside the opening cash balance.

Then list the expected receipts and payments by week, including the company’s other jobs. Payroll, supplier deposits, subcontractor payments, equipment costs, overhead and existing debt payments all draw on the same resources.

The receipt dates deserve particular attention. Sending a payment application is one step. Getting it approved and collecting the money are others. Project managers and accounting staff need to agree on what is likely to arrive and when. A disputed change order or missing document may change that estimate. Retainage needs its own expected collection date.

A weekly total can hide a problem, too. Money arriving on Friday does not cover Tuesday’s bill unless other cash is available. When the balance gets tight, looking at individual days is worth the effort.

A Comfortable Ending Balance Can Hide a Shortage

Take a hypothetical contractor with $150,000 in available cash. Management wants to maintain a $75,000 operating reserve. The following simplified forecast includes both existing operations and a proposed project. The figures are illustrative, and the reserve is not a recommendation for other contractors.

The company expects to finish week six with $190,000. But it falls below its reserve in week two and is $10,000 short of covering scheduled payments in week three. The negative balance shows an unfunded need, not an assumed overdraft.

To stay at or above the chosen reserve, the company needs another $85,000 at its lowest point, before any new financing costs or repayments. That is the amount the forecast brings into focus.

Now move the $100,000 receipt from week four to week six. Nothing else changes. Cash falls to negative $65,000 in week four and negative $110,000 in week five. Maintaining the reserve would now require $185,000.

The company still ends week six with $190,000. One late payment has nevertheless added $100,000 to the peak cash requirement. Looking only at the final balance would miss it.

Other scenarios can test an earlier supplier deposit or higher mobilization costs. Each needs a clear explanation of what changed so management can decide how to respond.

Follow the Financing Through Repayment

With the size and timing of the gap in view, the contractor can assess possible responses. Agreed changes to payment milestones, purchasing schedules or the sequence of work may help. Supplier and subcontractor payments cannot simply be moved in the forecast without agreement.

For a financing offer, enter the expected funding date, the proceeds available after upfront deductions and each required payment. Then look at the weeks when repayments overlap with payroll and other bills.

Does the company still have enough room if a customer pays late? Does the forecast run far enough to capture the remaining obligations? Financing that covers mobilization can create pressure later if the repayment schedule does not fit collections. An application still awaiting underwriting or closing also cannot be treated as available funding.

The forecast needs attention after work begins. Someone should be responsible for updating expected receipt dates and following up on billing exceptions. Comparing actual cash with the forecast each week gives the team a chance to respond when an assumption changes.

Time is a contractor’s friend when working on a financing deal. Starting with the payment terms, deadline and purpose of the money leaves room to evaluate the choices. Waiting until the cash is almost gone gives the business much less say in how the gap gets filled.

SEE ALSO: WHY REVENUE RECOGNITION DISCIPLINE DRIVES CASH FLOW, CREDIBILITY AND GROWTH IN CONSTRUCTION