Managing cash flow in a small construction business

Benjamin Dyer of Powered Now muses on how to avoid the tank trap of running out of cash.

People want to be paid on time so as soon as a construction business runs out of cash, it is likely to descend rapidly into chaos and bankruptcy. For that reason, keeping a keen eye on the money is critical for anyone running a business and is worth thinking about how prevention is better than cure.

Cash flow basics

• Up-front deposits for significant jobs, or even getting customers to directly buy materials under your direction (which may keep you under the VAT limit if you’re small) is a must. It shows that the customer is serious and they have some skin in the game too.
• Don’t have too much stock on hand as it ties up money. Excess stock can end up being stolen, damaged or lost and may deteriorate, so it’s not just about cash flow.
• If you can get a business credit card it can help to smooth things out. However, don’t let the balance keep rising as that’s a big red flag for pending problems.
• Don’t miss out on retention payments, they are pure profit. The same applies to recording CIS. If you don’t have a system that tracks retentions, put a note in your phone diary to reminder you when to collect.
• Look up invoice factoring on Google if you don’t know what it is. It could be the saviour of a fast growing business with good margins.
• Paying suppliers on time is good practice because you may need a critical favour one day. However, that’s no reason to pay early which is nearly always bad. A trade account can provide credit as well as discounts, so make sure you have one where you can.

Timely collection

The key to timely collection of cash is raising invoices correctly. The following are some ideas related to this:

• Make all invoices for residential work “Due on receipt”.
• Agree payment terms in advance when working for another business.
• Invoice regularly on larger projects. It seems like more work, but it hugely helps cash flow and also flushes out any possible payment problems as early as possible. Guy Hands, Screwfix regional tradesman of the year explains: “On longer jobs, I ask clients to pay in instalments with payments at the end of each week.“
• Softly chase invoices as soon as they become overdue. Don’t train your customer that it doesn’t matter by letting things slide.
• Collect money in cash, with cards (PayPal Here is a useful new service) or bank transfers. Unlike cheques, none of these bounce.

Hidden perils

There are two perils that lurk for successful builders. The first is where rapid and profitable growth reduces your bank balance rapidly as many jobs with work in progress eat into your working capital. The result is that you suddenly can’t pay either staff or suppliers. It’s the worst way to go bankrupt because it comes from success.

The second peril is over-dependency on one customer. If you fall out or they get problems, it can kill your business. Again, this is heart breaking as often it comes following rapid growth and a tremendous feeling of achievement.

Plan the future

As you grow, it gets harder and harder to keep track of the cash. As soon as you start to feel that you might be losing control, is the time to start cash flow forecasting. You almost certainly want to get your accountant to help. Matthew Stevenson of The Landscape Company sums up the pertinent point well: “It’s worth having a good accountant.”

Sourcing capital

By keeping some cash aside, you hugely reduce the probability of problems. The simplest and least painful way to achieve this is to have a policy of always drawing slightly less than your profit, so a balance builds up over time.

Leasing is probably the best source capital for major purchases, although a bank loan could be appropriate here to. Remember that when you are small most loans will need a personal guarantee. This means that the bank makes the profit but you take the risk. It’s something I have always managed to avoid.

Crisis, what crisis?

Cash flow issues are about the worst problems to hit in your construction business as they generally come with little time to find a solution. That’s why preparation is key. It’s much better to prepare properly than to have to endure years of remorse if things go wrong.

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About the author

Benjamin Dyer is CEO and co-founder of Powered Now.

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