Cash is king in any industry, but this is especially true for the construction sector. Keeping busy doesn’t necessarily translate into profits for Australian building companies, with margins being squeezed and competition becoming more intense by the day.
It is no secret that cash flow problems are the biggest killer of small businesses. Two thirds of Australian SMEs that go bust are actually profitable and according to some studies, as many as 82% of small business failures are down to poor cash flow as a result of debtors paying late.
It’s not just about staying in business. Cash flow issues probably have an even bigger effect on growth. We just never get to hear about all the small businesses that are stuck in a rut because their cash flow constraints are strangling them.
A typical small-to-medium construction company could easily have upwards of $200,000 worth of invoices outstanding at any time, and the money it receives each month depends on how promptly its clients pay.
At the same time, its monthly operating bills need to be paid on time, every time. A business such as this requires careful management to ensure it always has sufficient funds available. After all, a failure to pay wages on time, or “bouncing a cheque” to the landlord or a key supplier, will have immediate and serious consequences.
Businesses also have one-off expenses, especially if they want to grow. These could include the purchase of new equipment, R&D or an expansion of staff. Depending on the funding option selected, this could result in further expenses as there are now monthly repayments to make on a business loan or overdraft.
Even businesses which take cash flow planning seriously can struggle to predict their inflows for a given month. You may assume that all your clients are good payers, but you never know what problems they may suddenly face.
Making hay while the sun shines
When business is brisk, it’s tempting to make hay while the sun is shining. If you have an amazing business with a truly unique selling point, that might work out fine. For many construction companies, however, it I san approach that can lead to profits flowing to the bank rather than into the owner’s pocket.
In order to ensure all the hard work during these busy periods pays off, business owners must regularly review their finances and financing – otherwise, they can end up working for someone else without realizing it.
When sales take off, it’s natural to do everything you can to service them and keep clients happy. After all, that’s the secret to good business.
However, financing a growth phase is not so simple, even when it only involves scaling up production without making dramatic changes. Faced with a spike in demand, it’s easy to justify taking on an extra business loan or diving deep into a business overdraft that was only supposed to bridge the occasional cash flow gap.
Three quick steps to reviewing your businesses’ finances
1. Start with a general review of the business operations: Sitting down and delving into the numbers is always a good practice and will help you spot whether margins are sliding or increasing due to economies of scale, for example.
2. Don’t forget cash flow: Even when a business is technically profitable, cash flow can be negative if customers take longer to pay their invoices and suppliers demand their payments sooner. Try to forecast your cash flow needs, weekly, monthly and quarterly and ensure there is ample cover in the company account. Remember, cash is king!
3. Consider your financing options: Business owners will usually think carefully about a new financing option if it is a planned one-off, but when it is part of an organic growth process they tend to go with what is easily available. If expensive options are chosen, the costs can add up. Working out the real cost of business financing options can be tricky because you are not always comparing like-for-like.
Reviewing your finances as well as your operations on a regular basis is a valuable exercise for any construction company. It will help you spot potential cash flow problems as well as identify areas where costs are escalating and money is being diverted from your bottom line, and ultimately help you not simply survive, but thrive, in competitive times.
Angus Sedgwick is the CEO of The Invoice Market, a funding and cash flow provider to Australian small and medium enterprises.