Cash is your best mate…
In all lines of business ‘Cash is King’, but in construction, it’s more critical than most. There are so many reasons why cash in your bank rather than in your clients is important – whether it’s to buy equipment, employ and pay subcontractors, or simply to improve your credit rating, the list goes on.
Too often contractors fund projects for their client, which causes them problems when subcontracting or managing their own finances and this shouldn’t be the way.
So what can be done to manage your money better?
- Cashflow Forecast. This may sound obvious and yes, I know it’s boring, but a challenging, targeted, forecast – created at the outset of a project – is the perfect tool for you and your team to stay cash positive. In doing this, you’ll also identify Risks and Opportunities with cash during the project and be able to manage them.
- Advanced Payments. If you’ve got some major up-front costs, then ask for an Advanced Payment (sometimes called a deposit). For example, if you’ve got to pay a deposit with a certain supplier to secure materials, then your client should be understanding and happy to assist. Get this written into the contract if possible. Just remember that if you’re asking for an Advanced Payment there should be some genuine expenditure – without specific costs you may alarm your client pre-contract that you have cash-flow issues, so be thoughtful.
- Front Load your Applications. When negotiating the contract push for payment of Materials off site and also reduced payment terms. This will be to the benefit of both you and your Subcontractors/Suppliers, easing pressures down the line. What’s more, when doing your Applications, value design, management and prelims as early as possible to get cash in the bank.
- Retentions. This may not be project specific; but check every single month the Retention you’re due on old projects. The money is yours, collect it and use the benefit of it to stimulate success on your current projects.
What are the real benefits?
I understand it’s common sense to push for cash into your business as quickly as possible and therefore, perhaps not that stimulating a read. However, did you ever think about how cash flow forecasting could directly impact your profitability too?
Here’s just two examples:
- It gives you Flexibility. How often have you been asked by a Supplier or a Subcontractor for reduced payment terms in return for a discount? Imagine if the project was cash positive and you could easily calculate if you could afford reduced payment terms in return for a discount. Understanding your cash position means you can intelligently create opportunities for savings and increase profitability.
- Strength in Negotiation. As the project comes close to conclusion, it’s important the contract value is as close to paid as possible. In doing so, at final account stage, you’re all but ring-fencing your original margin and simply negotiating on extras. A large sum outstanding on your account exposes you to:
- Opportunism from your client in terms of counter claims; and,
- Payment likely being the majority of your profit. You may have other cash flow stress that impacts decision-making and/or negotiation to the detriment of the project.
So, get the money in now!
With a little diligence, you’ll discover just how beneficial an accurate cash flow can be on your project and therefore, the wider business. So don’t delay…