1 in 5 construction businesses has a problem with cashflow, according to recent research by TSheets that examined the health of cashflow management in construction.
That’s a worrying statistic for anyone running a cash-poor construction company, and a timely reminder of the need to keep on top of cashflow management, spend management and detailed cash forecasting within your business.
If you’re finding that poor cashflow is a regular worry in your construction company then it’s time to get more proactive with your approach to cash.
What affects cashflow in a construction company?
Cashflow is vital to business success. And, as any accountant will tell you, it’s all about balancing cash inflows (revenue from sales and construction projects) against your cash outflows (the money spent to keep these projects moving forward). If your costs are higher than your income then your cashflow position is quickly going to start drifting into a negative position.
Building and construction is a sector where operational costs and expenses are generally high – with a constant pipeline of overheads and expenses that can quickly drain out the liquid cash in the coffers, leaving you without the finances needed to continue working on client jobs.
Key reasons for poor cashflow
To keep your construction business financially stable, it’s important to understand the elements that will have the biggest impact on your cash inflows and outflows – making it easier to start improving your overall financial management.
Raw materials – to carry out any kind of building and construction, the business must buy the raw materials needed for each job. That’s things like timber, cement, bricks, fittings and all the various items you’ll buy from builders merchants and wholesalers.
Overheads and expenses – to run a construction project, you’ll have a range of overheads to cover, including costs like rental of site buildings, utility bills for your offices, mileage and petrol for your workers and any other sundry expenses the team work up.
Labour costs and payroll – unless you’re a sole trader, you’ll have to factor in paying office-based employees and your site workers, and running weekly and monthly payrolls. Plus you’re likely to have Construction Industry Scheme (CIS) payments to make too.
Taxes payable – tax liabilities can make up a big chunk of your cash outflows. You’ll be paying corporation tax at 19% on your profits and VAT at 20% on most of your purchases. And if your turnover is over the £85k threshold then you’ll also be a VAT-registered business; meaning you’ll have a quarterly VAT bill to pay to HM Revenue & Customs (HMRC).
Taking on unprofitable jobs – a full order book might sound like a good thing, but if you take on too many low-profit jobs this soon starts eating into your cash numbers. If jobs overrun, or costs escalate, the profit margin can quickly start to slide away.
Poor billing schedules – if you don’t invoice your client at the right times, this can be a route to cashflow disaster. Billing for work only on completion leaves you with a gaping hole in the cash kitty, as costs rack up with no income to cover these expenses.
Change orders affecting the project scope – when the scope of a project changes, this can mean extending the work (bad news if you’ve agreed a set fee) or even reducing the size of the project (meaning a smaller bill and reduced revenue into the business).
Slow and late payment – if customers don’t settle their bills on time, that creates an aged debt that will rapidly reduce your cash income numbers; leaving you with more cash leaving the business than is being generated.
Keeping in control of cash
Construction requires a keen eye on your accounting to keep the company in the ideal positive cashflow position. By being organised and keeping an eye on your key numbers, you can rapidly start to balance your cash inflows and outflows more effectively.
These are just a few key ways to keep in control of cashflow:
Run estimates for each job – so you have the best possible grasp of the costs, overheads and expenses you’ll incur, balanced against the fee you’ll charge out.
Keep costs under control – customise your Chart of Accounts to apply a unique code to all costs, allowing you to record, track and review your spending across the business.
Only hire the people you need – payroll can be one of your biggest costs as a construction business, so be prudent about the number of workers you engage.
Get organised with invoicing – it’s imperative to bill a percentage of the overall fee at the start of the project, with regular bills throughout to cover your project expenses.
Be proactive with debt management – review your aged debtors regularly and be organised about sending invoice reminders and chasing up those late payers.
Plan your tax costs – factor in your CIS payments, quarterly VAT bill and annual corporation tax costs across the period, so you have the correct amount of money in the bank to make these payments to HMRC.
Forecasting cashflow in construction
Knowing your cashflow and cost numbers in the past does allow you to estimate your future cashflow position. But with modern cloud-based forecasting tools, such as Fluidly, it’s possible to get extremely accurate projections and cashflow forecasts to help your cash management.
By integrating a forecasting solution with your cloud accounting software, you can:
Run projections for each site – giving you the ability to forecast cashflow for each individual site or job, and plan ahead to make sure you remain in a positive position.
Monitor your cashflow KPIs – setting clear metrics for cashflow on each job, and across the wider business, so you have up-to-date data relating to your cash position.
Take action early – by using the ‘early warning’ capabilities of forecasting, you can plan ahead, take preventative action and sidestep the common cashflow pitfalls.
The value of cashflow forecasting
Forecasting your future cashflow position is the easiest way to stop cashflow becoming a key concern for your construction business.
Using the real-time data from your accounts, you can quickly build up realistic and robust projections and forecasts of your cash position over the course of the period. And that information is gold dust when it comes to managing your finances effectively.
By keeping costs in check, boosting income and looking ahead down the cash pipeline, there’s no reason why cashflow should be a worry for you or your construction business.