As the cost of living and inflation continues to soar in the UK, so too do the pressures on business finances, which is why it is important for business owners to reassess their cash flow management practices.
“Cash flow is the lifeblood of any business,” says Louise Longley, Insolvency Director at professional services consultancy Begbies Traynor, when recently interviewed for the FMB’s Master Builder magazine. “It is what allows stock and materials to be bought, overheads to be met, and staff to be paid on time.”
Cash flow essentially means the amount of funds flowing into and out of your business. Maintaining a positive cash flow – where more money is flowing in than is flowing out – ensures that you can take advantage of new opportunities, pay your staff and your suppliers on time, and deal with unforeseen expenses without taking out significant debt. Negative cash flow on the other hand – where more money is flowing out of your coffers than is coming in – can sink even businesses that on paper show healthy sales figures and profit margins.
FMB members have access to free, unlimited expert advice through our business helplines. Our expert advisors can offer guidance on cash flow management, debt recovery, financial management, VAT matters, and more to help members keep their businesses on track, particularly through challenging times.
But what other steps can you take to keep your SME construction business on the right track? Check out our top tips for maintaining confidence in your cash flow.
1. Optimise cash flow by streamlining payment processes
It’s important to work with your client(s) to agree how and when you will be paid, and to sign a contract locking these terms in place. All FMB members can access free contract templates via the members area of our website which should help to establish a payments process that is fair and transparent to your client(s).
When doing so, it’s important to consider the following points:
Make payment as easy as possible for your clients
Leaving unnecessary barriers in the way is a sure-fire way to delay payment from clients who may not be computer savvy or have a lot of time on their hands – make the process as easy as possible for them.
When sending out invoices, it’s wise to include direct links or buttons to facilitate payment (some software packages may do this for you automatically).
Discuss different payment plans
There’s a variety of ways to structure your payment plans, so consider options such as stage payments on fixed dates, milestone payments when specified aspects of a build have been completed and payments according to the value of works completed at various stages.
When setting out a contract, it’s also important to set out the terms for any Key Performance Indicators (KPIs) - that's what benchmarks you're using to measure if the job has been completed to a satisfactory level. You should also set out how to handle any disputes and ensure the language used is clear for all parties concerned to understand.
Consider automated payment reminders
If your building project is one of considerable size and duration, it can be easy for key payment dates to be lost amongst the day-to-day tasks we all grapple with as part of contemporary life.
Setting up automated payments reminders is something most modern accounting software packages will allow you to do, helping your clients stay ahead of their billing deadlines and keeping your cash flow steady.
Tackle late payments proactively
Adjust payment plans for struggling clients
Accommodating those who fail to make their payments might seem counterintuitive when you’re looking to protect your cash flow, but if a client is genuinely struggling with their finances then offering adjusted terms could be the difference between them paying eventually, or not paying at all.
Obviously, this is not something you want to offer lightly, but in some instances, you might have developed a good working relationship with an existing client who has fallen on hard times. Offering them a helping hand could help preserve this relationship, leading to more work further down the line and the possibility of a strong recommendation to their friends / family – all of which can contribute to future cash flow for your business.
Charge promptly for any changes or alternations to original orders or plans
During larger, more complicated builds it’s not uncommon for clients to request changes, alterations, or additions to the original brief in light of new prices, weather conditions or product availability.
With that in mind, be sure to pass on the costs associated with making these changes quickly – ideally through an agreed change mechanism in your original contract. Waiting until the end of the project to do so leaves all of the pressure on your shoulders and could undermine your cash flow.
2. Review your debt collection processes to improve cash flow
Maintaining a robust debt collection process is key to protecting your cash flow and ensuring your business stays above water.
Sometimes knowing when to press your clients for monies owed can be difficult, but ultimately if you fail to make it a priority it’s unlikely that they will either. Longley advises businesses to be tenacious in pursuing payment,
If the measures outlined in tip #1 aren’t producing results, it may be worth considering an alternative approach. FMB members can access dedicated financial and debt recovery helplines to guide them through the process of following up with late-payers. Ultimately, if your client proves uncooperative with all your attempts to negotiate, Citizen’s Advice offer guidance on how to take the matter to small claims court.
3. Check your cash flow regularly to spot any potential issues
Longley also advises that when it comes to cash flow crisis, “prevention is better than the cure”. Conducting a regular cash flow analysis is a great way to ensure that your business stays financially healthy.
Modern technology can be very helpful in helping you determine costs, payments, and ultimately a reliable cash flow statement, with a variety of accounting software packages on offer for the UK market. When it comes to estimating future costs in a speedy and efficient manner, check out our blog on Building Software to get an idea of whether your cash flow evaluation might benefit from teching up.
4. Conduct a cash flow forecast
You can produce a forecast for future cash flow by evaluating your upcoming cash inflows and plotting them against your projected expenses. Taking the time to do this regularly can give you a heads up on any potential cash flow challenges and help identify persistent financial pressures you may need to address.
Of course, forecasts can never account for the last-minute changes or requests that can distort your financial plans but knowing what sort of financial shape your cash flow is in moving forward can bring you considerable peace of mind.
5. Cut unnecessary expenses to keep your cash flow positive
If after conducting your cash flow analysis you can see that there are some expenses taking a particularly heavy toll on your finances, it might be time to consider making cutbacks.
Of course, there are some outgoings that are truly essential and can’t be reduced – but you might be surprised by how much money can be saved by simple steps like going paper-free, working from home instead of renting an office, or selling unused equipment including monitors, desks or chairs etc.
FMB members have access to business advisory helplines for free, unlimited expert advice on a range of matters from contracts, debt recovery, human resources, tax, health and safety, legal matters and more. Join today and save money by reducing your current expenses on similar services.
6. Make sure you are getting the best available price(s)
As the industry begins to adapt to the market forces that have played havoc with material prices in recent months, make sure you take advantage of better prices by shopping around and letting your local supplier know that you are prepared to source alternatives if they cannot stay competitive on price.
Negotiating better deals on your materials prices will contribute to a better cash flow situation and reduce the need for you to take on any extra debt. Keep up to date with the latest news on building materials and pricing.
7. Use credit cards to protect your short term cash flow
As the UK building industry continues to grapple with volatile materials costs, you may plan to make these purchases using credit / finance. This frees up more of your money to be spent on business operating costs, helping you manage the day-to-day tasks more effectively.
As with all forms of finance, make sure you have a realistic plan for paying off the debt before going ahead. For example, have you got a contract in place with your client? Whilst this measure is useful in maintaining a positive cash flow in the short-term only, you should always remain aware of the interest charges that will accrue by making purchases using credit.
8. Don’t jeopardise your cash flow by working with clients who cannot pay
Every year in the UK hundreds of billions of pounds worth of unpaid debt heaps significant pressure on SME businesses, with many reporting cash flow challenges as a direct result.
Whilst it’s not possible to protect against every potential scenario where a prospective client might be unable to pay, you can perform basic due diligence to reduce the risks of working with them. Asking the client for a bank reference can help you determine how risky it may be to work with them.
9. Train your Project Manager(s) in cash flow management
With work in progress often contributing a significant proportion of your overall cash flow, it’s important to have project managers who understand your company’s financial position who can keep an eye on things on-site and head off potential issues.
Training your project managers to understand the challenges associated with protecting cash flow can be good way to encourage profitable building practice amongst all your staff. You could even consider offering financial incentives to reward those who do a good job of it.
10. Protect yourself against future cash flow shortcomings by building up your reserves
In today’s unpredictable business climate, it pays to have cash reserves on-hand to protect you against adverse events, such as the recent COVID-19 lockdowns and the product availability challenges associated with the Ukraine conflict.
Setting money aside when things are going well is excellent cash flow management practice, no matter how little you are saving at a time.
11. Consider hiring an accountant to help improve your cash flow
Staying on top of your tax obligations and managing your cash flow can very quickly grow to the point of becoming a job in its own right. Hiring an account might seem like a steep investment for a business looking to keep control of expenses, but doing so can free up your time to do what you do best: producing building work worthy of the Master Builder badge of quality.
Accountants specialising in construction businesses now operate throughout most of the UK, so set aside some time to investigate your local options and assess how they might be able to help you. The formal training and expertise they can offer could also help you maximise the gains associated with completing many of the steps outlined in this guide.
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