Managing cashflow in the building industry can be tricky business.
Although cashflow principles are very similar between industries, the difference lies in the types of cashflow dilemmas each industry faces.
The construction industry over the last few years has suffered significant setbacks which are not likely to ease up anytime soon. The old adage, ‘cashflow is king’ has never been so relevant in the building industry than it is today.
The flow of external money is slowing down for various reasons. Bank administration, supply chain issues, construction delays, and late progress payments, all have a flow on effect into the individual building company’s rate of cashflow and if not managed, can threaten their longevity and profitability.
Don't Let Your Bottom Line Deceive You
A building company that keeps a close eye on its profit and loss statement, might see a positive figure on the bottom line. However, what this doesn’t show are the constant cash flow struggle to ensure that supplier, subcontractor, wages and taxation obligations are paid on time.
A builder’s cashflow struggles can also have a direct impact on their relationships with subcontractors and suppliers.
When a supplier or subcontractor invoices a building company, their payment terms are typically stated on that invoice. Payment terms of 30 days used to be the standard, however, these are becoming less frequent with payment terms of 7 to 14 days or even payment upfront becoming the new normal.
The predicament a building company gets into is that if they do not have good cashflow management, they are only in a position to pay their subcontractors and suppliers when they get a progress payment.
This then causes further cashflow disruption down the line for subcontractors and suppliers. Their own debtors don’t care that they may be waiting for money to come in, it is not their problem. A sub-contractor waiting for money is not a reliable sub-contractor and opens up a can of undesirable worms.
They may cut corners to save money, compromising the integrity of the home being built, or stop work altogether until they get paid. The strain of the relationship over payment may also get to a boiling point resulting in a sub-contractor walking off a project.
The person responsible for accounts payable within a building business is quite often also bombarded with calls from subcontractors wanting to know when they are paid, and often fields requests to be paid early.
If payment terms are unable to be met or if no payment date can be stated, these interactions can also become heated or in some cases abusive, which is not good for either party.
Mitigating The Burden
Due to the nature of the beast and the cycle of cashflow in the building industry, many builders will look to other sources to make ends meet and try and get everyone paid on time.
These include relying on external funding, short term loans, or equity contributions from the Directors to try and improve their cash position to keep operations moving while sacrificing profitability.
Another way some builders try and solve their cashflow problems is by taking on more jobs thinking it will increase profit and therefore cashflow. This misconception leaves them open to further blowing up their current situation and questions surrounding their business’s future viability.
While external factors can dictate inflows, there are ways a building company can mitigate the burden of cashflow constraints.
One of which is increasing the frequency of progress payment stages. This allows the builder to recover a portion of their costs associated with a project earlier, thereby maintaining a steady cashflow.
A non-payment clause in their building contract also can protect the builder in case of client non-payment, halting a project until issues are resolved and more money is spent on sub-contractor labour and materials.
Some building companies may also use invoice finance as a way to address cash flow challenges. Under this type of facility, a third party will advance a percentage value of a subcontractor's invoice straight to the sub-contractor. Giving the builder some breathing room and then when due, the builder pays the third party and they pay the subcontractor the remaining amount less a fee.
And in some cases, this is a way for builders to pay their subcontractors early, at no cost to them and can actually make money.
Utilising A Third Party
One such company is Fifo Capital. As an Association of Professional Builders Preferred Partner, they can provide APB members with supply chain finance. Fifo provides a builder with an off balance sheet finance facility.
The builder can then offer subcontractors early payment of their invoices. If a sub-contractor wants to be paid early, they are paid from Fifo and are charged an early payment fee. A portion of this fee is shared with the builder, so when it comes time to pay Fifo, the builder pays less than the original invoice amount.
A builder can also use the facility as extra working capital to leverage supplier discounts or to pay any of their own general invoices.
Also by signing up to Fifo through APB Rewards, APB Members can receive an additional 4% per annum rebate on their Fifo Capital service costs.
You can find out more information about how to activate your APB Reward with Fifo Capital here.