It’s no secret that negative cash flow could cripple a business. No one is exempt from this fate, as recently seen in the demise of construction giant Carillion. However, it is smaller businesses that need to be especially careful when it comes to managing cash flow in order to stay afloat, let alone make a profit.
Small and medium-sized enterprises (SMEs) comprise 99% of the 280,000 UK construction businesses. These businesses spend on average 130 hours each year chasing payment, at an average cost of £1,500 per business. Resulting in £180m in debt interest charges and late payment, which is a primary or major factor in 20% of industry insolvencies.
So, how can businesses avoid this fate and maintain a positive cash flow in spite of all the challenges.
Contractors and subcontractors can do some background research on a client before entering a contract
Firstly, contractors and subcontractors can do some background research on a client before entering a contract.
If the client has a history of failing to pay on time, querying invoices, or generally not co-operating, it is advisable not to embark on the project at all, as the money spent on labour and resources may not be made back. Asking other contractors for references is highly recommended.
Next up is the importance of thorough cost forecasting. A cash flow forecast allows roofers to estimate how much cash they will have at every stage of the project. From this, roofers will be able to establish the stage at which they need to be paid by clients before they have to pay out for materials and labour. It is crucial to monitor the forecast regularly as the project is ongoing in order to determine whether it is on track financially or if there are areas where costs could be cut.
Correct payment at the right time
Timely payment collections are fundamental to maintaining cash flow. Without receiving the correct payment at the right time as set out in the forecast, things can start to unravel when it comes to meeting payments required by suppliers. For this reason, knowing how to correctly invoice clients is crucial. Agreeing payment terms before work commences will avoid any confusion later down the line.
On larger projects, contractors should invoice regularly as opposed to waiting until work has finished; asking to be paid weekly or monthly will keep things moving along nicely. As soon as an invoice becomes overdue, businesses should chase immediately. This doesn’t necessarily mean getting aggressive, but it serves as a reminder for the client.
As soon as an invoice becomes overdue, businesses should chase immediately
Collecting payments on time has been made easier with the introduction of electronic banking. Contractors should ensure they accept electronic payments so as to speed the whole process up as much as possible and to keep a one hundred per cent accurate record. With that being said, staying on top of the books and keeping an ongoing record of incomings and outgoings as they happen is highly advised to prevent any nasty surprises later down the line.
Change is inevitable in the construction industry. Nothing will ever go exactly to plan, and the ability to effectively communicate these changes to a client sets a successful business apart from its struggling counterparts. It is crucial that changes are communicated to the client as early as possible and are well documented in writing for future reference. It is also advisable to check whether the client definitely has the funds to accommodate the change before taking the decision to implement it, however big or small.
A clear way for businesses to prevent a cash shortage is by always keeping some aside. The most obvious way to do this is to enforce a policy of always drawing less than the profit made so that a balance builds up over time.
Maintaining positive cash and running a profitable business is fundamentally down to preparation. Conducting the relevant research, carrying out a thorough and realistic cost forecast, monitoring and recording changes, putting the measures in place to ensure prompt payment, and communicating openly and consistently with clients will put a business in the very best position for success.