Jon Munnery, an insolvency and company restructuring expert at UK Liquidators, outlines how small to medium (SME) construction businesses can manage their cash flow
Payments in construction are notoriously slow, which can be seriously detrimental to small and medium-sized (SME) businesses. In fact, consistent late payments place significant pressure on cash flow and are a common cause of insolvency in the sector.
Long lead times, complex supply chains, and low profit margins exacerbate cash flow pressures, leaving little room for controlling cash or for contingency planning that can stabilise an SME’s finances.
Working capital availability in larger construction companies is typically much better, so how can you manage your cash flow as a small or medium construction business and reduce your financial difficulties?
Make long-term cash flow projections
Predicting your cash flow needs over six months or more highlights where shortfalls might occur. A cash flow projection isn’t static, however, and needs to be updated as you become aware of new cash needs or income.
Your accounting software may include a cash projection module, which can help you reach a reliable estimate for the coming months, see where working capital is going to be needed, and manage your cash situation more accurately.
Secure invoice finance to deal with payment gaps
Invoice finance can be invaluable for small and medium construction firms as it offers a steady inflow of cash each month. It’s a form of alternative finance that uses the value locked inside your sales ledger.
The financier advances around 80-90 percent of your unpaid invoices very soon after they’re issued. This gives you the freedom to plan your construction projects and promptly pay for the assets and workforce you need to complete them.
Use collaborative software
Collaborative software provides a broad overview of current and planned construction projects for your team and helps you manage your finances. You can estimate your project costs, for example, budget, and then reliably allocate resources where they’re needed.
Complex construction supply chains can also create delays and affect cash flow but supply chain finance also provides a collaborative platform on which you interact with your buyer and the finance provider, offering transparency and potentially greater financial stability.
Tighten up credit control
Bad debts are the scourge of cash flow and SME businesses in any industry, but the unique challenges within construction mean that strong credit control processes are an absolute must.
These should include:
- Checking the creditworthiness of all new customers as well as monitoring the credit scores of your existing ones
- Clearly stating your terms of payment on your contracts and invoices
- Setting cautious credit limits for new customers
- Automating billing and chasing up payments using accounting software
- Charging statutory interest on outstanding debts and being prepared to take legal action where appropriate
Refinance your hard assets to generate cash
If your company has balance sheet assets of value you can refinance them to improve cash flow. A sale and leaseback arrangement, for example, involves selling an asset to a financier and then renting it back.
The sale generates a lump sum to improve your overall cash situation and the monthly rental payments help budgeting whilst allowing you to use the asset consistently. At the end of a refinancing agreement your company takes ownership of the asset again.
Good cash flow management for SMEs in construction
Although the payment structure typically favours larger construction organisations, small and medium firms can take steps to improve their cash flow and operate on a more equal footing.
From flexible types of funding to sector-specific software, you can see where you’ll need to allocate cash, track and manage your projects, and use your sales ledger and hard assets to gain control of your SME’s long-term cash situation.
