Whether you’re working on the most expensive project in the world or a more straightforward house build, effectively managing cash flow is vital to keeping your job on plan and your business profitable.
Here are Hudson Weir's top tips for controlling your cash flow in the construction industry in 2017:
- Do your research. Knowing your client before you agree to carry out any work is an important first step in any construction project. If they have any history of failing to pay on time – or worse, not at all – it may not be a risk worth taking, however enticing the final profit looks. They might be promising you a huge sum of money but you need to make sure they have the financial means to pay. Don't be afraid to collect references from other businesses the clients have worked with in the past to be confident of this before you sign any kind of contract.
- Have a thorough plan of what’s coming in and going out every month. A cash flow forecast means you can estimate how much cash you will have at every stage of the project. You can then work out important steps such as ensuring you get paid by clients before you have to pay out for materials and labour. Monitoring your forecast regularly as the project is ongoing also means you can see clearly whether you are on track financially and whether there are any regular costs such as utilities that you could reduce or change.
- Put yourself first. If your business isn’t going to make a profit from the work, is it worth doing? Once you’ve established you’re definitely on track to make money, then work out a realistic and profitable estimate for the project. Don’t promise the potential client a low price so they will use you if you can’t deliver it with a profit – but on the other hand don’t set your costs so high that they will start looking elsewhere. Also think about asking for a deposit on large orders so you have generated enough cash to get started.
- Keep on top of the books. However well your business is doing, if you fall behind with the books you’ll be doomed. You might have ten profitable projects going on at once, but forget to set a schedule for the invoices or fail to collect them and you’re not going to have any money to pay your staff or buy materials. Agree clear payment terms and conditions with clients from the outset and set up a simple way for them to pay you so you know you will receive everything on time – or know immediately if you don’t. Sending invoices as soon as the work is completed will also mean you get your money as quickly as possible.
- Timing is key. You need to make sure you have enough cash at hand when you are due to pay money out. For example, if your customers have 30 days to pay you but your suppliers need to be paid within 14 days, you’re going to be left in the red. Working out a proper timing schedule as part of your cash flow forecast (see point two) will help you work out the most appropriate payment schedules to suit all parties.
- Keep channels of communication open. Make sure your clients can contact you at all times – if they have a question or issue and can’t contact you to resolve it, they may delay a payment which can then have huge knock-on problems. Give them a point of contact who they know they can speak to should any issues arise. It’s also worth having a strong relationship with your bank so you can let them know in advance about any unforeseen changes or delays.
- Stay on top of change. Anyone working within the construction industry will know that projects rarely stay the same as originally planned – whether it’s something as small as choosing a different door handle or moving the location of a wall. Almost any change has an impact on cost – and you need to make sure you agree a way to communicate these changes to the client. We would recommend telling the client about any changes to cost as soon as possible; but whether you provide updates on a daily, weekly or monthly basis, make sure all changes are well documented. It may sound obvious but it’s also worth checking the client has the funds to pay for the change before you make the decision to do it, however minor it seems.
Being thorough, well organised and open with clients are all key to controlling your cash flow in the construction industry, but if you follow these simple tips we’re confident your business will remain a success.
By Hasib Howlader, Director at Hudson Weir - an Insolvency Practitioners based in central London.