Though its origins are unclear, the investment phrase ‘Cash is King’ refers to how important readily available funds are to a company trying to stay afloat in an unstable market. With the current lockdown in place and the uncertainty it has created, construction companies need to make difficult short- and long-term decisions to stay solvent.
First, let’s establish what cash flow is and how it works.
Cash flow is the inflow and outflow of money from a business and is necessary for daily operating costs, scheduling tax payments, buying inventory, and paying employees. Positive cash flow indicates an increase in a company's liquid assets, enabling it to settle any of the above-mentioned factors while providing a buffer against future financial challenges. Negative cash flow means you may be spending more than you’re making.
According to The Master Builders Association (MBA) North, South Africa, the construction industry faces an uphill financial battle due to the nature of how payments are structured. With billing only occurring once work has been completed, the suspension of payments during lockdown has created a knock-on effect that is felt throughout the industry. Since the built environment already has a climate of late payment, streamlining your cash flow system now will enable you to re-enter the market with a positive outlook once the lockdown ends.
Here are some points worth considering, both now and post-lockdown:
A sure-fire way to avoid non-payment or delinquency is to do a background check on all new clients before signing a contract. Getting references, obtaining a credit rating, and speaking with your colleagues about a potential client will ensure that billed work receives payment on time from the start.
Managing cash flow on a profitable project is difficult enough without the uncertainty of an erratic market. By taking advantage of cash flow management software, you’ll have a better picture of your current costs through receipt analysis while delivering a realistic billing schedule based on accurate data. With up-to-date information and complete transparency on all costs involved, you will not only produce better forecasts but cement your reputation with a client.
Unless you’ve received a large discount, arrange a structured payment plan wherever possible on all purchased materials. While you may incur interest, this will leave you with more money on hand. Remember, all suppliers want your business and you may receive a better deal if they know that you’re willing to look elsewhere.
- Process change orders—work added to or removed from the original scope of a project—swiftly so that those funds arrive in time to help finish the project rather than waiting until completion.
- Automate your processes so invoices are sent quickly to guarantee consistent payments.
- Avoid over-billing (overcharging a client) and under-billing (completing work without billing for it) on invoices. While the former means you have greater funds at the start of a project, it guarantees you have significantly less at the end. The latter leaves you scrambling for cash as you work. The best approach is to bill according to how much of the project has been completed.
- Train your project managers in cash flow management.
Additionally, you can reduce the days before receiving payment (currently between 60–90 days) by following the points above while offering payment incentives, writing clear terms and restructuring them for defaulters.
What to do post-lockdown:
- Consider renegotiating the delivery terms of existing contracts with building material suppliers. Finding common ground regarding payment and due dates is key and will help stabilise your cash flow in the weeks and months ahead.
Negotiating an extension with your clients or declaring force majeure will help you avoid penalties for failing to meet your deadlines. While this doesn’t create immediate cash flow, it allows you to pick up a project immediately, secure in the knowledge that your clients are still with you.
- As mentioned in a previous blog discussing “How to recession-proof your construction business”, one of the major lessons of the last recession was that you can’t put a price on skilled labour. Use incentives to ensure that you return to work with the best equipped and most knowledgeable team, ensuring deadlines are met without delay. In doing so, you’ll avoid hiring sub-contractors and reduce expenditure associated with incidents and delays.
MBA North president and Gothic Construction Director, Wayne Albertyn, has stated that one of the solutions companies are using to stay afloat during the lockdown is forcing their employees to take annual leave now with an eye on working through the traditional December–January builders’ holiday. Another option is to move payday to the end of the month to preserve cash flow.
Whatever decisions you choose to make, it’s clear that acquiring and maintaining a reserve of readily available funds while seeking specific cash flow solutions will ensure your business stays afloat during these turbulent times. In the end, a return to a fully functioning construction industry will only be experienced by those organisations that look after their people, who spend wisely and save where possible.
Ensuring every cent received or paid is fully accounted for makes for a happy balance sheet. To achieve this:
Take annual leave now
Keep your best people
Chat with your clients
Reach out to suppliers
Practice on-point accounting
Spread your costs and shop around
Forecast future cash flow
Vet all your clients