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Construction Industry Pitfall Number 3: Cash Is King

16 January 2020
Mark Friend
Building & Construction, Raising Finance, Building a Business

This is the third in a series of four articles centred on common pitfalls experience by building and construction businesses. To an extent there is a degree of overlap with my second article but for this article I want to focus more on the cash side of the business.

If you missed the early articles you can view them at the following links:

  1. Are my workers genuinely self employed?
  2. Construction failures are on the increase- how can I protect my business?

For over 30 years I have worked as a tax and business advisor to countless small and medium size building and construction businesses. Many have flourished but unfortunately many have failed. Cashflow is one issue which comes up time and time again.

There is a well known saying that cash is king and in no other industry is this statement more poignant than in construction.

There are basically two cash issues construction business owners need to address assuming that the jobs are properly costed and run:

  • Ensure that the business is properly financed.
  • Cashflow management and credit control.

Ensure the business is properly financed

It sounds obvious but it really doesn’t matter how profitable a job is or how well managed the business is if your business in underfinanced you stand a strong chance of failure.

Underfinancing usually takes place when the business is first set up or going through a period of growth. Basically you are spending money faster than the money is coming in, often with the money coming in exactly per the contract. Labour and materials costs are incurred before the work can be invoiced and the monies collected.

Whilst you might be able to secure credit from suppliers the probability is you will have to pay your workforce up front.

To cover this cash shortfall the easiest way is of course to put your own capital into the business. However in practice this might not be possible.

Obvious areas for getting finance are the bank- an agreed overdraft facility or loan. Increasingly we are seeing business owners going to commercial lenders who aren’t banks such as Iwoca or Funding Circle for simple loans. Often the reason they go to these lenders is for the ease of lending- a less protracted process/ less form filling but usually more expensive and more personal security on the line.

Another popular choice is factoring companies. Historically most factoring companies will steer clear of construction businesses due to contractual issues around invoicing, however a number of factoring companies specialise in the construction industry.

Making sure the business is properly financed as a startup or during periods of growth is fundamental, so calculate the finance required and make sure you have it in place.

Cashflow management and credit control

Let us assume now that the business is well financed, jobs are profitable and well managed. Everything therefore should be plain sailing?  Unfortunately despite this there are still issues – this time not to do with the jobs themselves but due to poor cashflow management systems and basic failures in credit control.

Here are 14 easy steps to improve cashflow management and credit control:

  1. Vet your customer. Be choosy and make sure you have a proper application process. A simple credit check on a company can reveal that the company is brand new and has little in the way of track record, or a history of CCJs and bad payment history. Do you really want to work for this business even if the contract looks great? Carry out a risk assessment and if you still decide to do business consider getting cash up front and ensure that your terms and conditions are crystal clear.
  2. Monitor your customer. Your business circumstances will change and so will your customers. Make sure you subscribe to a credit software such as Creditsafe and monitor your key customers to check for any changes in their credit ratings.
  3. Bill on time or ensure valuations are on time. Too often we see a job virtually complete before the first invoice goes out or long delays in billing as the business owner is too busy.
  4. Bill correctly. Make sure you understand the terms for payment of your invoice. Larger contractors may insist on purchase order numbers, approved worksheets etc… making sure the invoice is right first time will ensure prompt payment.
  5. Bill more frequently. Don’t just bill when the job is completed but consider increasing the frequency of billing. If you have to purchase materials upfront for a job why shouldn’t an invoice go out straightaway? Instead of monthly billing why not bill fortnightly, weekly or even daily if you have numerous small jobs being carried out each day.
  6. Send reminders out before the due date. Why wait for an invoice to become late before chasing? Credit terms are credit terms so a polite reminder of when payment is due should not be detrimental to the relationship. Invoices should be paid by the due date. The due date is an indication of the final date for payment not the first!!!
  7. Ensure queries/issues are dealt with swiftly. Even when invoices go out correctly they are often queried by customers, so don’t sit on the query and give the customer the opportunity to delay payment. Make sure any issues are dealt with swiftly.
  8. Send out reminders automatically. Whether you use an automated system such as Chaser or a manual system make sure there is a system to chase debts quickly and promptly.
  9. Provide incentives for early payments and charges for late. If you can build this into your terms and conditions from the outset then this can be a really useful way to encourage prompt payment.
  10. Phone up the debtor or better still visit in person. Don’t leave it just to emails and post. You shouldn’t be embarrassed. If anything the customer should be as they are taking advantage of your good nature and you are effectively funding their business.
  11. Have a credit control officer. Sometimes you and your team can be too close to the customer. Having someone else chasing the debt takes the emotion out of the process.
  12. Get to know the purchase ledger clerk. Many large firms will have a large accounts team. Getting to know the person who will be making the payment, a Christmas present, a thank you gift or note all help to build relationships and hopefully put your invoice or request for payment to the top of the list.
  13. Go legal quickly or walk off site. No one wants to do this and as a result most business owners delay it. However nothing works better than pulling offsite or simply saying sorry I have to go elsewhere to do a job because they pay and you don’t!!! Going legal may damage the relationship but to be honest the relationship is probably already damaged with the failure of the customer to pay on time.
  14. Document your credit control system. Having all the above written out in a diagrammatical format helps pinpoints weaknesses in your systems and provides clarity to your team.

Each element of the above can probably be broken down even further. If you don’t know where to start on credit control then give us a call and we will put you in touch with a company who can provide you with the help you need to remove this as an issue.

If you have any points of concern we would recommend you speak to your adviser or call one of the team to discuss this further. Email us here.

The content in this blog is correct as at 16/01/2020. See terms and conditions.

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