Cash flow is a major issue for tradies, not just for growth but for business continuity. Silver Peacock accountants have worked closely with CEO’s and managing directors of multi-tiered construction companies to improve their business cash flow position by coming up with various strategies.
Cash flow restraints can be a stressful thing for businesses, you’re not able to meet your obligations, you have to start getting rid of people, and so on.
There are three major aspects to cash flow that we find cruisal for construction companies, these include:
- Profit Margins
- Cash inflow
- Managing cash
How should a business determine its profit margins?
We have heard from many business owners that due to current industry conditions, they are trying to be competitive by reducing their profit margins.
Accountants at Silver Peacock have always advised against that! Infact, we encourage healthier and larger profit margins. To increase your profit margin does not necessarily mean increasing your current rate, you can achieve a greater profit margin by reducing your current cost.
Customers are willing to pay, when they know what they are paying for and feel they are receiving more than what they are paying for. So, how do you tender? In other words, how do you defend your pricing?
In the trades and construction industry, the largest overheads are almost always your material and labour. Therefore, it comes back to you as a business owner, do your research, get quotes. Pursue discounts, especially if you have been a loyal customer yourself to your suppliers. In most cases, suppliers can offer you a discount of about 3%-5% without much negotiation, establish relations that you can leverage to increase that discount.
But also offer a little more, provide guarantees to make the customer feel they are receiving more than the average job blow. These guarantees do not have to be financial guarantees either, you can offer workmanship guarantees or even a guarantee that you will complete the job within an agreed ETA.
Tradies love their tools! We know that given that the majority of our clients at Silver Peacock are tradies and builders. Some have great computer skills and tech savy. But others, not necessarily.
What ends up happening is after providing the service, an invoice is raised, and after some delay, it is sent to customers, and in many cases never followed up before 30 to 60 days. This is poor account keeping practice.
Our research at Silver Peacock have shown that most accounts when they exceed 30 and grow to 90 days they can quickly become a doubtful debt, and if the account exceeds 90 days then your business is likely to suffer a bad debt.
Don’t forget that in some of the jobs you completed, you paid your labour upfront or as the work is completed, most of your suppliers you purchased material from are on account, but you have signed a personal guarantee on these accounts, which means you will be liable to pay.
Silver Peacock works closely with its clients to develop business policies and procedures to adopt which allows for a healthy cash flow, first secure the job, but you should be paid as you are performing the work as it progresses.
For non corporate clients, as soon as you collect a deposit, complete the job, as soon as the job is completed, send out the invoice within 4 hours, allowing them 24 hours to pay. Be quick and be immediate. Now a day, there are technologies and applications that allows you to send out invoices from your phone in a job site. The more urgent you are about your invoice, the more urgent your client will be, the more relaxed you are, the more relaxed your client will be.
Managing your business cash flow is all about cash inflow and cash outflow. The cash outflow is as a result of either a variable or a fixed cost. Fixed costs may include, rent, employee wages and salary, variable costs may include materials, motor vehicle and so on.
Every business has its cycle and during the year it has its busy period and its cash position is great, what every business does not do is consider those times of the year where it’s not so busy weather its seasonal or an industry trend.
Some businesses tend to increase their investments when it’s busy instead of maximising the use of their resources to full capacity, for example, hire of additional HR, expansion of operations etc. But what happens when it’s not so busy? The business will still have to pay its fixed costs such as employee salaries and wages.
For this very reason, Silver Peacock encourages its clients to work with us in developing a budget and forecast for its business. Through this, we are able to establish control measures and through regular reporting you are able to manage and control your business cash flow. For example, by monitoring performance variance reports you are able to determine favourable and limit or eliminate unfavourable costs.