Cash is like blood that flows through the body: if it stops then the patient will die, even if the patient is otherwise healthy. A recent study by East & Partners found that for 86% of Construction companies their biggest issue is cash flow. Whether your business is growing (which is why 59% of businesses seek funding) or struggling through setbacks, managing cashflow is the single most important factor in securing a business’s future. Here are some ideas on what you can actually do to improve your cash flow.
The number one factor that causes business failures is putting off addressing cash flow issues until it is too late, which greatly limits the options available. Don’t forget the Golden Rule: “He who has the Gold makes the rules”. Cash flow issues have to do with several factors, including a lack of hours in the day to dedicate to chasing money or addressing the underlying causes. There is also a bit of a stigma or fear of asking for money, and with the Banking Royal Commission findings now starting to take effect, it will become more difficult to access finance through the traditional big 4 banks. This is leading businesses to use alternate lenders and sources of finance. But there are some other do’s and don’ts when it comes to managing your cash flow.
Factoring of invoices is a bad idea in a lot of cases. By giving up a fairly large portion of the invoice value, you get paid part of the money owed (70-90%) by the factoring financier early. It probably gets you the money 45 days earlier than you would otherwise. But your neck is still on the line if the debtor doesn’t pay, and the factoring company won’t chase the debt too hard (they usually get a greater cut the longer the process takes), so you still haven’t addressed your businesses underlying problem: why isn’t your customer paying on time? And for that privilege, you are giving up at least 1-5% of your invoice value, which is a very substantial portion of the profit. You’re paying about 5-10 times as much as you need to for access to this money.
Don’t expect Government to help, in fact the same survey said 73% nominated red tape and compliance as the major cause of cash headaches. This is because things like BAS and Fair Work rules regarding employment conditions give businesses no flexibility in terms of payment terms – super and tax office payments as well as employee pay cycles give employers no leeway on payments even when your customers delay payments to you. Businesses can to some extent alleviate these “shocks” by planning their cash flow.
Tempting as it might be to string out your suppliers, that is also not a good strategy. Your business can’t function if your suppliers cut you off, and the suppliers you probably need most to keep you going will consider the historical trading relationship when the time comes when you might need their support. If you are in strife, make sure you talk to your suppliers (before they contact you) and don’t ignore them.
What to do:
So what are some real world ways of dealing with cash flow issues?
Review your Assets – this is probably where most of your cash is locked up, so make sure it’s giving you a good return and regular cash coming in. Sell machinery that has low utilisation. Hold off upgrading equipment if you can, as assuming you have kept up with maintenance it is usually more economical to repair and keep the existing gear running than to replace it. And if you must replace your machines, buy good used machines as the single biggest cost in owning machinery is depreciation followed by the cost of capital. Maintenance costs and fuel costs are also up there, so look at how you can save by using new replacement parts and reducing fuel consumption (idling too much?).
Track your income and expenditure – always know how much you have spent and committed (that is, you are still to pay for it), and make sure you invoice your customers as soon as possible. The longer it takes you to charge your customer, the longer you are giving them before they will pay you. Make sure you also planned for business cycles, such as the slow down over Christmas periods. Simple as this sounds, be very frugal with your spending and work out the difference between “nice to have” and “need to have”. Do you need all the vehicles? Is updating something essential now (or at all), or can it wait?
Know your breakeven point – your breakeven point is the point at which revenues meet your expenses. You will also need to know your fixed costs (which you are up for whether you are working or not) and your variable costs. Until you understand those, you can’t improve your breakeven point.
Get deposits and progress payments from your customers and use other means to encourage early payment. Also try to spread your risk – whilst big customers are tempting, make sure you also have smaller (often more profitable) jobs as well, which will keep some money coming in more frequently. And talk to your customers, for instance by being diligent to follow up on outstanding payments – if you don’t show the urgency in chasing the money, they don’t see the urgency in paying on time.
Don’t over-extend yourself – it’s tempting to grow beyond your current capital ability by borrowing to leverage your business. This strategy can work, but make sure the debt doesn’t become a noose around your neck if your business has set backs. Remember, many of these can be outside your control: weather, project delays, etc may all delay your cash flow, but the loans still need to be paid. It won’t take long, and the debt will control you. Consider alternative strategies, such as a joint venture partner for the project, or hiring at least some of the equipment rather than buying so you can easily divest the cost.
Obviously every business situation is different and the above is general advice only. We have all heard the expression “Cash is King” which refers to the importance of having funds in any business. Don’t let the lack of cash ruin your prospects.
As always, onwards and upwards!