Your business might be at capacity and earning a healthy profit, but it all counts for nothing if there’s no cash in your account to pay suppliers, staff, and subcontractors. Cash flow problems can spiral dangerously, leading you to delay payments and risk losing the goodwill of your subcontractors, not to mention the future of your business.
One way to handle cash flow issues is to extend payment terms with subcontractors. We saw Carillion change their payment terms to 120 days as standard several years ago in an attempt to ease cash flow problems, but as we now know, this didn’t resolve the underlying problems at the business. Some experts speculated that Carillion tendered at very low margins simply to bring an immediate influx of cash to the business – even if the price itself was unrealistically low.
But we’ve seen that Carillion’s approach to cash flow management didn’t work. Although it’s difficult to draw parallels between the problems faced by one of the biggest construction companies in the UK and smaller construction businesses, the importance of a healthy cash flow applies to all businesses. Here are a few tips to strengthen your cash flow and avoid any disasters.
#1 Gain control of data
You probably use a range of software and pen and paper methods to keep track of projects, costs, and business activity, and tying all this data together is very time consuming and prone to errors and inaccuracies. If you find that your business struggles to control all these sources of financial information, consider adopting an integrated accounting system. This’ll help you identify problem contracts quickly, giving you more time to take action before your cash flow gets hit.
#2 Reduce human error
Humans are always the weak link when it comes to data accuracy! Your software is reliant on the accuracy of data that us humans add to the system, so it’s important to be aware of where and how inaccurate data gets entered into your job costing software. Check out our previous blog post on this topic to get started. Inaccurate financial data may obscure a looming cash flow crisis.
#3 Reduce equipment downtime and inventory
A significant portion of your cash is tied up in materials, equipment, and machinery. Once you’ve purchased these items, any downtime (or time they’re in storage) is inefficient. Sure, you can’t run your plant 24/7, but you can work to assign vehicles and equipment more efficiently so that you’re making the most of the cash you’ve spent on these assets. By optimising usage of your current stock you should be able to reduce the frequency of new purchases and rentals.
Overall, arguably the most effective way of managing your cash flow is to understand its role in your business, and where your vulnerabilities lie.