Despite electronic payments, the adage about cash being king still rings true across the building sector in Australia.
Cash pays suppliers, workers, bills and loans and keeps people, materials, tools and equipment coming to site.
Yet cash flow management can be challenging.
That raises questions about common mistakes which builders make and strategies they can adopt to manage liquidity effectively.
According to Peter Donovan, chief executive officer of Bizprac, mistakes fall into several areas.
First, some builders and subcontractors adopt a complacent approach toward cash flow management and operate according to a presumption that money which is owed will naturally be paid.
Many who operate in this way, Donovan says, do not adequately track their cash flow and are unaware about their current cash flow situation.
Indeed, he said, many further operate under a misconception about everything being fine as long as there is cash in the bank. This is a fallacy, he said, as many are not taking account of bills coming in or who amongst their client base is late for payment (and potentially in financial strife).
Second, some contractors do not adequately track costs on each job and are unaware about which jobs if any are susceptible to blowouts and thus negative cash flow impacts over the near term. In some cases, he said, cash flow challenges associated with existing jobs are obscured by the receipt of deposits on new jobs – a situation which sees money being used from new jobs to complete troublesome existing projects.
Third, some builders occasionally make the mistake of believing they have more profit than is indeed the case. This can occur where payments from customers have been received but invoices from creditors are yet to arrive.
Fourth, there is a failure on the part of some subcontractors to ensure they are paid on time. This is not so common among very small contractors whose cash flow is tight but rather those who have a few more jobs, a little more money and a more ‘relaxed’ about the state of their business. These people, he said, might well be willing to allow larger clients to go longer without being paid. Where this happens, complacency surrounding invoice and collections management can emerge. Where one large debtor either falls over or significantly delays payment, serious problems can result.
To manage cash flow effectively, Donovan say several strategies are needed.
First, estimates on your jobs must be accurate.
Second, you must correctly price your job. To do this, you need a realistic estimate about the full cost of completing each job which accounts not only for on-site labour, equipment and materials but also overheads such as vehicle leasing, electricity and administration.
Third, contracts must be correctly signed off at the start of each job. These need to cover everything that could potentially go wrong along with everything that the client understands that they will receive.
This extends to variations. Oftentimes, Donovan said, clients agree to variations verbally but refuse to pay for those for which sign-off has not taken place when the bill comes due.
Fourth, it is critical to keep track of which tools and materials are needed on site and when these are needed. Where this does not happen, delays are created as subcontractors arrive on site but are not able to work. This not only exposes the builder to potentially latent conditions but also delays the completion of various project stages (and thus invoicing for these stages).
Fifth, overhead management is critical and it is important to keep track of how many workers you employ, how many vehicles you have on lease and where your money is going.
Finally, contractors should avoid taking on a greater volume of work than what they can reasonably manage from a cash flow and resources perspective. Whilst business expansion is good, Donovan says this should be done at a manageable pace in which resources and cash flow are not stretched too far.
A critical tool, Donovan says, is construction business management software. This, he says, enables contractors to access the reports they need when they need them. In terms of cash flow, he says the software can enable an easy snapshot of current cash positions by showing contractors how much money is in the bank, which invoices they have sent out (and how much they will bring in) as well as which invoices have been received from creditors (and how much they expect to pay out).
Throughout the building sector, effective cash flow management is critical.
With simple strategies, significant gains can be delivered in this area.