Lee Swinerd advises how to safeguard against poor cash flow
In the early stages of a construction business, cash flow is arguably the most important factor to consider. Indeed, one in four businesses fail due to interruptions to cash flow, and large projects can cause issues, as often businesses must fork out for raw materials and wages before a payment from the customer arrives. Safeguarding yourself against late payments is becoming increasingly complex, but proper systems and management are a necessity.
If your business is experiencing problems with customer payments, following these seven simple steps will help to reduce the risk of a gap opening up between forecasts and results. After all “turnover is vanity, profit is sanity but cash is reality!”
So how do you keep your construction business ahead of the game? Follow these simple seven steps to master your cash flow management:
1. Don’t just expect prompt payments
A handful of large corporations have recently extended payment terms up to 120 days for some suppliers, with 90 days not being uncommon. It’s important to find out what the payment terms are when you’re beginning a trade relationship with a new company and determine if you can afford to finance your customer’s business to that extent. The Federation of Small Businesses recently conducted research, which found that there’s currently £40billion in late payments from large businesses to their smaller suppliers.
2. Understand the paperwork
If you’re invoicing accurately, understanding your client’s payment processes and using the right purchase order numbers on every piece of communication, you’ll put yourself in a good position to receive on-time payment. If a company wants to refrain from payment, they will look for any excuse to do so. Don’t give them one. Get your papers in order and make sure that you’re ticking every single box. Make certain that invoices arrive on time and are dated at the point the goods are dispatched.
3. Forecast your cash flow
This might seem straightforward, but trying to run your business without a clear and detailed cash flow forecast is a bit like driving a car in the rain without windscreen wipers – you can do it, but you’ll have no idea where you’re going! Being aware of every completed transaction and updating your records accordingly will keep you ahead of the game and on top of your cash flow. Make sure you pick up those one-off and irregular payments as well.
4. Invest in your accountancy department
There are a lot of small businesses that rely on only a basic knowledge of accounting to fulfil an increasingly demanding area of their business. Your accountancy department should definitely consist of more than a bag full of invoices and bank statements in the bottom of a drawer! Credit management is a specialist area worth investing in.
5. Investigate the root of your cash flow problem
Late payments are often simply a result of bad financial practice. Inaccurate invoicing, inconsistent pricing, a lack of customer contact or misunderstanding your customer’s processes can all contribute to a below par payment infrastructure. It’s often the case that a professional can spot these kind of issues a mile off, so getting a specialist or consultant in to get to the bottom of your problem is probably a good idea.
6. Utilise technology
Technology is changing the way we track and handle our finances. There is now software available which will notify you of a late payment, or warn you a few days before a payment is due, giving you time to make contact with the customer in question to ensure on-time payment will be made. Software can also assist the invoicing process with templates that provide consistency and a professional look. There are also an increasing number of technology-based funding platforms that can help finance the working capital of your business.
7. If you don’t know how - seek help!
We know that it’s important to keep costs low, particularly in the formative years of a business. However, if giving your financial model a sustainable structure early on will help your business to grow the right way, it’s undoubtedly worth making the investment and seeking professional support. The sooner you can implement a structure that guards against interruptions to cash flow, the better.
Lee Swinerd is director of KPMG LLP, provider of professional services including audit, tax and advisory