Subcontractors incur more costs from their clients than they realize. When you use your own working capital to fund projects, things like delayed payments increase the interest you pay on your working capital. To that point, each client costs you something in the form of interest, inflation, and even lost opportunities, but subcontractors rarely recognize these costs, let alone know how to quantify them.
In a recent Meetup, construction consultant and fractional CFO Josh Luebker covered an exceptionally important but often overlooked metric: the monthly cost of working capital, by client. To make it easy, we’ve created a calculator to help you measure this important metric.
Understanding this metric and how to calculate it will help you identify:
- Which of your customers pay you “well”/with optimal DSO
- How much your working capital costs you based on average DSO for each client
- How much you need to add to your bids with each customer to offset the cost of waiting for payment
Once you’ve finished your calculations, you’ll be able to:
- Critically examine your DSO broken out by each client so that you can determine:
- Which clients should be prioritized based on hard data
- Which clients you need to have hard conversations about payment timelines.
- Assess some of your best clients through a new lens – how quickly they pay and how DSO affects your working capital costs
To get started, download the calculator.
Next, you’ll need to input project-specific DSO for each client on the first tab so you can calculate the average DSO per client. You should be able to find this information in your Quickbooks or calculated from your last project. Then, add information on each of your working capital options—including their average interest rate and monthly balance—to calculate the daily cost of financing both as a dollar amount and as a percentage.
Once you have the daily percent cost of financing, you will multiply that by the customer’s average DSO to determine what percent you need to add to your bids to account for the cost of capital for that particular client.
You can follow the step-by-step guide for how to do this following the information in the video below.
As Luebker points out from Billd’s Subcontractor Market Report, subs who account for the cost of capital in their bids are 11% more profitable than those who don’t. Extended DSO can erode profit, and that is why these calculations are so essential to make and act on. If you habitually work with customers who take too long to pay, you may find yourself losing money on jobs, effectively paying your customers to do work for them.
To get started with making your own insights, download the calculator, get your financial figures ready, and watch the video. You can also see the full Meetup available on demand here.
