I don’t know about you, but every morning I seem to wake up, scroll through the news on my phone and read about yet another building company going into liquidation. It seems like all you read now is how much trouble the industry is in. Rather than talk about the negatives all the time, we want to add some positivity to your life! We want to help your business thrive in these tough times, so we have been racking our brains trying to think of what advice we can give you that will help you the most, and that leads us to cashflow. Money is what makes the world go around, and having enough cash to pay the bills and leave some left over at the end of the day to have a nice life really is the aim of the game! So Let's Abba style this up and bring home the MONEY, MONEY, MONEY to ensure your cash keeps on flowing?
Some easy wins
There are some simple things that you can implement in your business to assist with cashflow that will have an immediate impact:
Know your payment terms and utilise them. If a supplier offers 30 day terms, make sure you utilise it and make payments closer to the due date and not early (use it to your advantage)
Prepare your invoices frequently and on time (this is so often overlooked - you need to prioritise)
Make paying your invoices easy, offer multiple payment methods (yes that means online too)
Follow up your debtors regularly, you don’t want to become your clients bank! (reminder notices, phone calls, courier pigeon, bulldogs, whatever it takes, ps. we don't condone violence here)
Have the correct funding options in place to make managing your cashflow easier. Utilise an overdraft to help in tough times, or convert overdrafts to long term debt if that allows you to have some cash surplus. (Stop maxing out your credit card, it's expensive and it's the wrong type of finance to use long term.)
By considering the above you help alleviate the stresses of wondering how you are going to pay that next big bill when it hits the inbox!
Failing to plan is planning to fail That saying is an oldie but a goodie. With the nature of the construction industry, if you have fixed price contracts, you will receive your income in large lump sums, spread across the project. It is important that you plan out the cashflow requirements of your projects and ensure that invoicing milestones are set at stages that will also cover significant cash outlay milestones. You will create cashflow stress if you incur all of the significant costs for the project upfront, but do not invoice and collect payment from the client until later in the contract.
Ensuring you plan out the stages of the project and agree to appropriate invoicing milestones will ensure you do not have to fund the project on behalf of your client.
I knew you were trouble when you walked in (but did you really?)
Let us paint you a picture, a potential client comes to see you. They take you on a wonderful journey discussing their vision of what they want you to build for them. They tell you their budget and you think yes this is great, what a beautiful partnership this is going to be, you can see the before and after on Instagram now.
Now let me bring you back to reality, how do you know they can actually afford the budget they have just given you? Do you perform any due diligence and credit checks on your clients before entering into a contract with them? Do you know that they actually have capacity to pay? More than likely your clients are doing a thorough check on you and whether you are licenced and whether you have any skeletons in the closet, but did you do the same for them? If a client is using bank funding, you can request a copy of the finance approval. However, if a client is self funding the project it can be a little more difficult. This is where you may need additional contract conditions such as requiring them to put the agreed funds into a trust fund or bank account or require them to nominate a guarantor. It is definitely something that needs consideration when you are entering into large dollar value contracts.
Another key thing to help with cashflow is deal with issues early on. If a client is slow in paying an invoice or 2 (or 3!), or is showing signs that they may be running into financial difficulty, you need to have that difficult conversation with them straight away, and stop work immediately. By stopping work, you will be able to stem the amount that you are having to outlay on the project and limit the amount of any potential loss. In reality this can be difficult if you are paying staff and they don’t have any other projects to work on in the meantime. Some solutions might be that you organise for them to take some leave at that time, you could use the time to catch up on professional development and upskill them or you can pick up some smaller jobs to tide them over whilst you work out a plan for payment with the client. By continuing on the project and incurring more and more costs with no sign of payment, you are putting your own businesses success at risk. HIA have some helpful advice around what to do if a client doesn’t pay here.
Know your numbers
I’m going to say this a little bit louder for the people down the back that didn't hear me the first 999 times we have said it. You need a good system in place to track your projects and know how you are performing. This is something that we mention every time we talk about the construction industry. You need a system in place that allows you to accurately estimate, quote, track project progress, budget and report to ensure you are truly understanding the profitability of your projects. This will assist you in making decisions and managing your cashflow requirements early on to avoid any issues later down the track. Knowing your numbers is key to making smart decisions.
Don’t forget the TaxMan-ian Devil AKA the ATO (because he won't forget you)
When you are looking at your cashflow it is very easy to forget about the pesky little (or big) thing called tax! You look at a project and you think great, I will invoice more than it costs, I’ll have money at the end. And you did have money at the end and you thought this is great I’m going to reward myself with something shiny and new (maybe that ute or van you've been eyeing off for a while now). And then a whole year later or more your accountant comes to you and says you did so well 12 months ago that you now owe the Tax Man all this money and you need to pay it now! plus prepay this year (what we like to call the double whammy of tax). That’s why you need to ensure that as you are planning your cashflow you are allowing for tax of 25% on your profit if you operate in a company (and you should as a builder for a million reasons that we will write another blog on later!) You also need to allow for the fact that this cash payment can often be deferred by upwards of 18 months, depending on your circumstances. We explain more about the double whammy of tax here
Phew, are you still with us? as that was a long one ... We know that if you are able to apply the above then you will have the money, money, money and be running a successful construction biz that you can be proud of and not lie awake worrying about where the cash is going to come from each night. As always if you have questions then please reach out to one of our oh so cool not nerdy at all accountants, especially Lee as she loves to talk all things accounting and building, it's her jam!
Disclaimer: The information provided is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice