It’s the word on just about every builder’s lips at the moment.
So, if you are feeling the crunch of cashflow challenges in your building business, you are not alone.
Understanding and managing cashflow has never been more critical given the many external factors building company owners have faced over the last couple of years.
But are the cashflow challenges crippling the industry a reality or just a perception?
Understanding Cashflow In Construction
Cashflow is the lifeblood of any construction business.
Unlike profit, which is a snapshot of financial health at a moment in time, cashflow is about the movement of money in and out of your business. It's a real-time indicator of your company's financial health and sustainability.
Many builders confuse cashflow with profit. While profit is important, it's cashflow that keeps your projects moving and your doors open. A common misunderstanding is that a profitable project or business automatically equates to good cashflow. However, you can be profitable on paper but still struggle to pay your bills if your cash isn't managed well.
Cashflow problems manifest in various ways: delayed project timelines, inability to pay suppliers or employees on time, and reduced capacity to take on new work. These issues not only strain your resources but can also damage your reputation and client relationships.
Improving Your Cashflow Position
So, what can you do to tackle cashflow challenges?
First, it's essential to regularly monitor your cashflow - ideally, daily. Look for patterns in income and expenses and understand the timing of these flows.
Implementing a robust cashflow forecasting system is crucial. This system should give you a clear picture of your financial trajectory, helping you anticipate and prepare for future cash needs.
Understanding the Work In Progress Accounting Adjustment (WIPAA) is also key. WIPAA ensures that the revenue and costs on your projects are accurately reported in the period they are incurred, giving you a true picture of your project's profitability and its impact on your cashflow.
To improve cashflow, start with efficient invoicing and collections processes. Ensure that invoices are sent promptly and follow up on late payments. Consider offering incentives for early payments.
Managing your payables is equally important. Negotiate favourable payment terms with suppliers and subcontractors to align with your cash inflows.
Preventative measures include maintaining a cash reserve for emergencies and avoiding overextending on projects without the necessary financial backing.
You can also use technology and software tools for cashflow management. These tools can provide real-time data, automate invoicing and billing, and offer insights into your financial health.
John’s Cashflow Story
Take this builder from Australia who is working with APB Executive Business Coach Dennis Wong. We’ll call him John to keep his name private.
In recent months, several of John’s key projects have been delayed. They are either starting much later than expected or must be redesigned and repriced. In some instances, clients have got cold feet and pulled out completely.
This has resulted in a hole in his construction slots for the quarter, and revenue will be lower than expected.
John has been understandably anxious about his cashflow and stressed to the point that he has been losing sleep.
Dennis got him to use APB’s revenue forecaster with the cashflow tracker in his KPI Dashboard. John has accurately predicted when he will need a cash buffer, exactly how much he will need, and for how long.
That has given him more confidence, knowing that the problem is only temporary, and he can see the way back to being cashflow positive.
Taking Back Control of Your Cashflow
The most crucial advice for managing cashflow is to stay informed and proactive. Regularly review your financial statements, understand your cash cycle, and adapt your strategies as needed.
Navigating cashflow challenges requires a combination of sound financial practices, strategic planning, and proactive management. By understanding your cashflow, implementing effective strategies, and staying vigilant, you can steer your business towards stability and growth, even in turbulent times.
Cash is king, and effectively managing it can be the difference between thriving and closing up shop!