Forecasting Cash Out for Subcontractors

What problem did you tackle?

A tax credit specialist regularly engaged with their clients in the quick service restaurant industry to help them get access to money based on their specialized knowledge of tax regulations. When tackling particularly specialized tax credit opportunities, they enlisted the help of specialists in those areas to make sure they’re getting the job done right.

But because sometimes the government might not be the quickest at sending out payments, many clients were slow to pay invoices in these niche credits, lacking the capital from the very credits these clients are hoping to receive to fund the bills for services. However, the company still needed to pay its subcontracted specialists in a timely manner too, and wanted to make sure there would be enough cash in the bank for regular business operations, despite these delays.

How did Norman Professional Services craft a solution?

By doing a deep dive into the company’s Accounts Receivable as well as projected invoice opportunities, Norman Professional Services built a spreadsheet that projected collections from all revenue streams alongside the expected payouts for these subcontracted specialists and other expenses based on the standard budget, such as payroll.

For the special, non-budget stuff, on a monthly basis, NPS met with the client to confirm the completed and expected throughput of this specialized work. Based on these completion dates, NPS mapped out when customers were expected to pay based on contract terms or special payment plans to capture special cash inflow. And based on the agreement with subcontracted specialists, NPS created a calendar of expected payments out to capture special cash outflow.

Additionally, to help stay on top of cash inflow from the more common courses of business, Norman Professional Services also discussed with the company about exploring opportunities to tighten up its cash collection process so that it could be more predictable and reliable. Through these conversations, the client implemented two new practices to reduce the likelihood of open invoice balances stretching out a long ways in time:

1. On a quarterly basis, the team follows up with clients regarding outstanding balances on invoices.
2. New contracts now include net payment terms and penalties for late payment to encourage clients to pay on time.

By creating an evolving cash flow forecast that accounted for the timing of customer receipts and subcontractor payments specialized tax credits, the company had insight into where they expected their bank account to land and gain the comfort that operations would not come to a screeching halt just because a large subcontractor payment hit the books in a given month.

What was the positive impact?

Profits from the specialized tax credit opportunities were able to become distributions with confidence, because calculations on future required cash outlays were already accounted for. And because measures were being put in place to encourage clients to pay in a timely manner, or to broadcast when they’d be able to pay via payment plans, the company had a better grasp on when that money was going to come in to be able to fund those outlays. This enabled a direct translation of company profits into dollars in the bank for the company’s leadership.

This careful and ongoing refinement also allowed the customer to keep track of their customer invoices and vendor bills related to specialized tax credit opportunities they subcontracted out to in a proactive way, anticipating the workload to be done and mapping that out over time so they can gauge performance and completion speed against expectations.

Additionally, these projections allowed the business to work effectively with their CPA tax preparer to craft a quarterly estimated payment strategy that met state and federal requirements and took advantage of tax strategies, including using excess capital to pay off outstanding taxes and vendor invoices within a calendar year to reduce tax liability exposure. Because the cash flow forecast was able to anticipate these strategies, the company already had the money in the bank to comfortably make those choices.

What’s next?

Specialized tax credit opportunities come and go with regulations, and while the company remains focused on continuing to push to find new business hand in hand with their subcontracted vendors, there’s already a vision for the company to return to its bread and butter recurring tax credit opportunities as well as to potentially diversify in the type of tax credits it seeks out and offers for its clients (potentially leveraging subcontracted help for those other credits, too).

The habits of projecting out cash payments have allowed the company to redirect some profits into investing in marketing strategy for the company to elevate the performance of their existing service lines. Just as with taxes, distributions, and subcontracted vendor payments, their marketing investments can be another line item in their cash flow projection, allowing them to see where their bank balance would be after special marketing spend.

Norman Professional Services can assist with projecting out the impact of these marketing initiatives not just on its overhead, but also in its top line revenue, setting up expectations on the return on investment to evaluate the performance of any specialists or initiatives the company pays for to grow the business model.