Feeling stressed? Managing the financial aspects of your construction business can be challenging. The effects of stress can wreck havoc on both your business and personal life, and ravage your health. So how do you alleviate financial stress?
The answer: focus on cash flow and credit.
Cash flow is one of the most critical factors for the success of your construction business. According to the Small Business Association, cash flow problems are one of the leading causes of failure for a business
Cash flow is the movement of funds in and out of your business. There are two types of cash flow:
Obviously, anyone with negative cash flow is going to start feeling the effects of financial stress. If you’re experiencing cash flow problems, additional funding can often help turn your cash flow problems around.
But if your credit is less than stellar and you don’t think you can qualify for additional business funds, your financial stress levels may be rising even higher.
Here are 3 easy steps to help you solve both problems at once.
The first step to alleviating financial stress is getting a very clear picture of your cash flow situation. If business finances are a source of stress for you, there’s a chance that you’ve been avoiding any kind of deep dive or regular budgeting.
Avoidance is keeping away from an activity or situation, or the thought of that activity, because of the anticipated feelings of fear or anxiety associated with it. Avoidance is a coping method that can actually increase stress.
Sound familiar? You’re not alone.
Only 32% of Americans keep track of their income and expenses through a set budget each month, according to a Gallup survey. That means the rest of us -- nearly 2/3 of Americans -- engage in active or passive avoidance when it comes to preparing household budgets each month.
But ignoring cash flow problems won’t make them go away.
In order to effectively manage the inflow and outflow of cash to your business, you need to regularly analyze your cash through a cash flow projection process.
Cash flow projection will enable you to clearly see the money coming in and out each month, and what you are left with after expenses are paid. To determine your cash flow projections, you can download a cash flow worksheet or create your own worksheet; the important thing is to choose a method that works for you and start facing the cash flow reality.
One vitally important consideration when calculating cash flow is cash reserves. The SBA recommends that a business always have enough cash to cover slow months in business, or 3-6 months reserves. Without reserves, a slow season or unexpected expense could get in the way of making payroll, purchasing materials, or other operating expenses.
If your cash flow projections are signaling it’s time to get some additional funding for your business, then it’s time to improve your credit-worthiness.
Your personal credit often impacts your business activity. For example, your personal credit is a factor that determines the cost of your contractor license bond. And your credit will definitely be a factor in obtaining additional funding for your business if you need more cash to operate.
Luckily, there are steps you can take to optimize your personal credit, making you more attractive to banks and lenders.
Maintaining a good balance between the amount of credit available to your (your limits) and the amount of credit you’ve actually used (balance) is an easy way to improve your credit score.
This is known as your “utilization rate” and it’s an important indicator of your credit risk.
The optimal ratio of credit balance to limits is between 10% - 30%. That means carrying a balance of $100-$300 for every $1,000 of available credit. Paying balances down as low as possible can help improve your ratios, but don’t run out and open new cards to try and improve your utilization rate. MyFico.com says this approach could backfire and actually lower your credit score.
Tip: Ask your existing creditors if you can raise your limits on cards to get your balance closer to the 10%-30% ratio, and avoid charging more on that card once your limit has been raised.
This may sound counterproductive, but carrying more lines of credit can improve your credit score by lowering your utilization rate. If you have a single revolving line of credit with a utilization rate higher than the recommended 30% balance to limit ratio, you may improve your score if you divide that debt between three different cards (as long as those cards had a utilization rate lower than 30%.)
Credit inquiries can have a small impact on your credit score. If you decide to open multiple cards to lower your overall debt ratio, know that a single inquiry (application) will demonstrate less credit risk than multiple inquiries in a short period of time.
Tip: Having multiple cards can improve your score, but running out and opening multiple cards at the same time can have a negative impact. Open cards carefully and methodically, and don’t run them up over 30% balance to limit ratio or you’re just digging yourself deeper into a credit hole.
According to Nasdaq.com, someone with a ‘“perfect” credit score would have at least one home loan, auto loan, and student loan, in addition to at least one credit card open and active on their report. While you don’t need to run out and get a student loan at this phase in your career, the takeaway is clear: a diverse mix of account types will help improve your credit score. If you’ve been paying cash for work vehicles and only have one credit card, you may consider adding an auto loan the next time you want to purchase a vehicle. Then use your cash to pay down the loan faster.
Tip: A mix of account types demonstrates stability and credit responsibility. This accounts for an average of 10% of your total credit score, however, so there is no need to rush out and buy a car or apply for a school loan if you don’t need one.
If you have worked diligently to pay off a credit card, your first instinct may be to close that account. But leaving an account open will help your overall utilization rate. Closing out old credit cards can shorten your credit history, and your credit history matters. You don’t want to lose a good history of making payments on time.
Even if you have good credit and don’t need credit repair, you can still optimize your credit score and make it even better. Have a good mix of account types, carry multiple lines of revolving credit to lower your utilization rate, and don’t close accounts just because you have paid them off. Most importantly, know your score. You are entitled to a free credit report every year. The best way to improve your credit is to stay vigilant about knowing your score.
You’ve calculated cash flow projections, so you know how much you need to cover your expenses and to set aside reserves. You’ve made efforts to optimize and improve your credit score. Now it’s time to get a line of credit or a loan for your construction business.
Gather your financial information and meet with your banker. But what if your efforts at optimizing your credit score haven’t paid off yet, or your cash flow needs are greater than what you’re approved for?
Don’t take no for an answer.
According to the U.S. Small Business Administration (SBA), alternative (non-bank) lenders are increasingly popular options for small business owners.
If you can’t obtain the business financing you want through a traditional bank, look to alternative financing options.
Alternative financing options include:
Financial stress can pour over from your business life to your personal life. Stress can have a negative impact on your health, wellbeing, and even your family. Getting a handle on your financial stress may feel difficult, but the payoff is huge. Easing cash flow problems and improving credit means more money to hire employees, invest in new equipment, market your business, and grow.
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