Cash Is King In Construction
A construction company consistently operating at a loss might eventually fail, but one consistently suffering from negative cash flow is highly likely to fail. Cash flow problems can take down even the most profitable of construction companies.
Cash flow is a difficult area to manage within any business and given that no two construction projects are the same, this only amplifies the issue for firms within this sector.
The reason you hear the saying ‘cash is king’ so much is because it is true, especially in the construction sector where you could be say, in the middle of a complex supply chain or that your first valuation payment can be well over two months after you’ve already paid out on your start-up costs.
A recent report by Asset Based Finance Association (ABFA) revealed that whilst most UK based businesses face an average wait of 61 days for their invoices to be paid, those in the construction industry are currently experiencing an average of 82 days. Indeed, the construction industry has been the hardest hit of any UK sector in terms of longer waits for invoices to be paid.
So, what can you do to improve cash flow?
- Cash flow forecasts – be meticulous in identifying what income and expenditure are expected on your projects. Individually map every project for cash flow. Roll this information up into a master forecast which includes non-project income and expenditure. Ideally you should be looking 13 weeks ahead so you can spot potential issues.
- Monitor expenses – to ensure that they are essential or if they can be reduced. Consider changing providers for utilities and services, reviewing lease agreements, travel and accommodation allowances, equipment etc.
- Manage cash payments smartly – unless you are benefitting from a large discount, consider using finance for supply only items and materials. You can usually negotiate very low interest charges and the increased cash in your bank can enable you to strike early payment deals with your service suppliers on an ad-hoc basis – to a greater net benefit.
- Relationship management – improving relationships both up and downstream will help you negotiate one-off payment terms when you need them. Always give flexibility in the way you work as that will pay back one day.
- Debt collection – have robust credit control procedures and try to ensure that clients remain within their payment terms. A good credit controller gets to know the pay departments and the tricks in getting on the early payment runs.
- Review your supply chain terms – if you have built up a reputation for paying on time, you will be surprised how many of your suppliers will consider agreeing to new terms because they know they can trust you.
- Consider cash flow funding. This can really take the pressure off, especially short term. There are a lot of players out there, all with their own terms and fees. This can get complex but we know them all and we can help you decide what’s best for you.
There are many other opportunities and tips to improve your cash position and we at Cowgill Holloway have unrivalled expertise in the construction industry sector. Such is our network of contacts if there’s anything we can’t help you with directly, we will know someone who can.
This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.
The information was correct at time of publishing but may now be out of date.