Whether you’re working directly with end users, providing contracting services, subcontracting, or providing a mixture of all of the above, cashflow can (on occasion) be a nightmare to manage for construction businesses.
But by using tools available, as well as some careful planning, you will be able to get through the peaks and troughs of cashflow and end up with a profitable business that also has cash in the bank.
Plan for extended payment terms
Now, hopefully you won’t end up in the position whereby your business is working on payment terms of any more than 30 days, but it’s not unusual for bigger businesses to work on 60, sometimes even 90, day payment terms.
The major downside of this is that your suppliers are more than likely not going to wait 60 or 90 days for their payments! Your merchants will want paying as usual, and your subcontractors, staff and other costs are all going to need to be paid monthly as always.
At this point you should be carefully considering an invoice finance/factoring facility. There is a difference between the two, but broadly speaking it’ll allow you to draw down the cash on your invoices within days of issuing them, but paying a small percentage of your invoice value for the privilege.
We use Capitalise for all of our clients financing. Explore your options here Capitalise
Automate your payment chasing
We’ve touched on this in other articles, but having your invoices chased automatically can free up your time to work on other tasks. Hopefully tasks that will make you money!
Using a tool like Chaser can streamline this whole process for you and give you the best chance of payments hitting your account when they’re due.
Make the most of your supplier terms & credit limits
This might sound obvious, but if your supplier gives you similar terms to those of most of our clients, for example “payment due 30 days after the end of the month”, planning the timing of ordering your materials could extend the payment date by 30 days.
So rather than ordering materials for a job that starts early in the month at the end of the previous month, order them on the first day of the month. That could be the difference between paying in 30 days or 60 days. A huge difference when you might be waiting for customers to pay.
Always take a deposit
You can take away a massive amount of your stress by taking a deposit that is at least equal to the cost of your materials for providing a job. That way, you will always have the cash in place to pay your main merchants for what is required.
Cashflow should then manage payment of any labour required, which comes out of the overall profit of the job.
If you’re running a larger job, extend this to taking staged payments throughout the course of the job. This limits your overall exposure and gives you the opportunity to down tools if the customer misses a payment.
Using an online accounting platform
Just by having formal accounting platform in place, you can see an improvement in getting paid on time. It’s like a chain reaction.
With the best will in the world, with a manual/paper system you’ll forget that someone hasn’t paid you.
If you’re using an online system (Xero, QBO for example), the system will give you visual reminders of any invoices that are overdue for payment. If you’re not already using Chaser (see above!), this will give you a chance to chase up payments.
This list is not the be all and end all of managing cashflow, and there will always be extra measures that you can put in place to protect yourself.
If you could do with a second opinion on anything within your business or wanted to implement any of the above, just drop us a line.