Though its origins are unclear, the investment phrase ‘Cash is King’ refers to how important readily available funds are to a company trying to stay afloat in an unstable market. With the current lockdown in place and the uncertainty it has created, construction companies need to make difficult short- and long-term decisions to stay solvent.
Cash flow is the inflow and outflow of money from a business and is necessary for daily operating costs, scheduling tax payments, buying inventory, and paying employees. Positive cash flow indicates an increase in a company's liquid assets, enabling it to settle any of the above-mentioned factors while providing a buffer against future financial challenges. Negative cash flow means you may be spending more than you’re making.
According to The Master Builders Association (MBA) North, South Africa, the construction industry faces an uphill financial battle due to the nature of how payments are structured. With billing only occurring once work has been completed, the suspension of payments during lockdown has created a knock-on effect that is felt throughout the industry. Since the built environment already has a climate of late payment, streamlining your cash flow system now will enable you to re-enter the market with a positive outlook once the lockdown ends.
A sure-fire way to avoid non-payment or delinquency is to do a background check on all new clients before signing a contract. Getting references, obtaining a credit rating, and speaking with your colleagues about a potential client will ensure that billed work receives payment on time from the start.
Managing cash flow on a profitable project is difficult enough without the uncertainty of an erratic market. By taking advantage of cash flow management software, you’ll have a better picture of your current costs through receipt analysis while delivering a realistic billing schedule based on accurate data. With up-to-date information and complete transparency on all costs involved, you will not only produce better forecasts but cement your reputation with a client.
Unless you’ve received a large discount, arrange a structured payment plan wherever possible on all purchased materials. While you may incur interest, this will leave you with more money on hand. Remember, all suppliers want your business and you may receive a better deal if they know that you’re willing to look elsewhere.
Additionally, you can reduce the days before receiving payment (currently between 60–90 days) by following the points above while offering payment incentives, writing clear terms and restructuring them for defaulters.
Negotiating an extension with your clients or declaring force majeure will help you avoid penalties for failing to meet your deadlines. While this doesn’t create immediate cash flow, it allows you to pick up a project immediately, secure in the knowledge that your clients are still with you.
MBA North president and Gothic Construction Director, Wayne Albertyn, has stated that one of the solutions companies are using to stay afloat during the lockdown is forcing their employees to take annual leave now with an eye on working through the traditional December–January builders’ holiday. Another option is to move payday to the end of the month to preserve cash flow.
Whatever decisions you choose to make, it’s clear that acquiring and maintaining a reserve of readily available funds while seeking specific cash flow solutions will ensure your business stays afloat during these turbulent times. In the end, a return to a fully functioning construction industry will only be experienced by those organisations that look after their people, who spend wisely and save where possible.
Ensuring every cent received or paid is fully accounted for makes for a happy balance sheet. To achieve this: