The Cashflow Solution ALL Builders Need…
You have likely looked at your company’s bank statement, wondering why things don’t seem right and if you’ve done that before, you are definitely not the only one?
Cashflow is a common term in the building industry, but it’s often misunderstood. Cashflow is more than just money moving in and out of your account – it’s the lifeblood of your business.
The Issue
Many builders look at their bank balance and often think a healthy number must equal profit. However, cash is not profit, and profit is not cash.
This mistake can be very costly and a good example of this is reckless spending on things like a new boat or truck, without really understanding the actual financial health of the business.
Typically, poor financial management, inadequate knowledge of the numbers, and inefficient internal processes are the root cause of the problem. If you’re not sure about what your business’s financials are telling you and whether they are accurately reported, you’re more likely to have a cashflow problem.
The Cycle
If you are facing a cashflow squeeze, you likely exacerbate the problem by hustling to get work done and paying the bills, neglecting the strategic aspects of your business.
You may accept low-margin jobs, thinking some income is better than none, only to find yourself worse off a few months later.
This can then lead to taking on debt under unfavourable terms, worsening the issue.
The Numbers
Solving your cashflow problems starts with understanding and managing your numbers. This goes beyond checking your bank balance; it’s about comprehensive financial management. Knowing every aspect of your finances, i.e. revenue, expenses, assets and liabilities, is crucial. As is understanding the timing of all those financial metrics.
You must implement a ‘Work In Progress (WIP)’ reporting system, as this will accurately represent your financial position and can reduce tax liabilities. Your WIP will ensure that you accurately adjust revenue and expenses to accurately reflect your trading position and therefore your tax liability. This is often overlooked and causes significant problems.
You should also aim to have a cash buffer in your business account at all times. Three months of operating expenses should be the minimum but ideally you could get to twelve months as a financial buffer. Think of this as an insurance policy, allowing you to make rational and calm decisions rather than reactive ones.
You should constantly track your workflow. This will allow you to scale required resources up or down, ensuring that you do not have a shortfall or significant excess level of capacity.
Where possible, you should consider invoicing strategies like progress billing, enabling you to get paid sooner for the work you’ve done or currently doing, This will help you to achieve a constant cash inflow.
When you are in a cashflow squeeze, you should resist the urge for quick fixes, such as excessive borrowing. You should focus your energy on rectifying the root causes – your business model and financial management practices. It’s not to say borrowing is bad, it should only be used where absolutely necessary.
The Time to Act
Cashflow problems in building and construction are not just about a lack of dollars. The dollars are the result of the operational and financial management problems, which if left as they are will only continue to cause you cashflow problems.
You must address these issues by being proactive with the financial management of your business.
Contact us today to access practical financial tools and expert guidance tailored to the building industry.
The time to act is now – take control of your cashflow today.
