Managing your business to ensure adequate cash flow is the single most important aspect of running any building and construction business.
Without ample cash to pay your subcontractors and suppliers, it is only a matter of time before you have to call “tools down” and you cannot complete the jobs you have on the go. Repeating this pattern over time may mean that you will be forced to shut up shop.
Cash flow describes all the moving parts that make up the transactions in your bank accounts; from receiving of cash from your customers, to paying your suppliers. Unfortunately, a lot of these moving parts will be determined by others, for example, the due date on your supplier and contractor’s invoices.
There are some tricks of the trade you can employ to ensure you are all over, and in control of, your cash flow.
Debtors
The quicker you collect the amount customers owe you, the less likely you be without funds available to pay your suppliers. Some simple tips to ensure you collect your invoices on time;
- Accept multiple payment options
- Automatic Reminders
- Virtual Debtor Management Team
- Payment Terms
- Consider Late Payment Clauses
Creditors
When negotiating terms with suppliers it is important to ensure that you agree to realistic and achievable terms. Ideally you will aim to delay payments as long as possible. Some simple tips to manage your creditors;
- Purchase on Credit
- Credit Cards - Note – this option requires discipline – be sure this is the right fit for you before swiping!
- Subcontractor terms
Post Contract Variations
Additional items that the client has requested and is willing to pay for are best processed when these changes occur, so that you are not carrying the costs of these variations all the way to the end of the job.
Invoicing and Collecting - Small Jobs < $20,000
It’s generally easier to account for small jobs, given the smaller timeframe over which these jobs are completed, at the end you issue an invoice to the client for payment.
It is imperative that the term for payment that you list on your invoices is less than the timeframe in which you need to pay your suppliers.
Planning, Invoicing and Collecting - Larger Jobs >$20,000
Under the Home Building Act 1989 (NSW) you are required to have a progress payment schedule for all works greater than $20,000. This schedule should provide clear descriptions of the work that is to be completed at each milestone. This works to your advantage - when it comes time for requesting payment, there is no disagreement of works performed. Sometimes, slight adjustments to your workflow can mean the difference of being able to issue the invoice earlier, even up to weeks earlier.
Knowing bank lending policies ahead of time can not only mean a smooth application process for your customer, but can also ensure that you can schedule your contracts in the most effective way to maximise your cash position.
Ensuring you have adequately scheduled your progress payments to fall in line with when major expenses are to fall due is critical in ensuring you have ample cash available to cover these costs.
Projected Cash Flow
Whilst the above discusses ways in which you can increase your cashflow, the most important aspect of running your building and construction business, is being able to effectively predict your upcoming cashflow.
Working with your Advisor, you can determine scheduling of key expenses that sometimes take business owners by surprise, like taxes. If you cannot effectively predict your cashflow in the upcoming weeks or months, by the time you feel the pressure of poor cash flow, it will be too late.
Key Takeaways
- Collect your debtors as quickly as you can
- Use cloud accounting software to assist with invoicing and collection administration
- Delay payment of your costs to their due dates whenever possible
- Process post-contract variations as they occur
- Schedule your contracts so that funds are received prior to paying your suppliers
- Project out your cashflow with your Advisor
