Every industry has its own specific challenges, and when you’re running a construction business your arch nemesis is likely to be cash flow.
In a sector where so much of your overhead is incurred before you get paid, it’s absolutely vital to have effective control over your finances and to know the exact state of your current cash flow – if you don’t, you can’t make buying decisions or take on new work… and that’s likely to prove fatal for the business.
So, if cash flow is critical to the ongoing success of the business, why do so many construction businesses have such a poor grasp of their numbers?
In part, it’s down to ineffective accounting processes and systems. And this is where the new breed of cloud accounting software comes to the rescue, with all the core benefits of keeping your business on top of its cash flow and in control of its decision-making and financial destiny.
The challenge of cash flow
Cash flow is the lifeblood of any construction business: without positive cash flow, you simply can’t function as a business.
The challenge is a straightforward one. In order to be able to take on new building projects, you need to be confident that there’s cash in the business to pay your workforce, cover the costs and get the job done BEFORE the invoice for that project is paid. The real challenge lies in being able to balance your income against your costs to make sure you’re always in this positive cash-flow situation.
So, why is this so difficult to do?
- Multiple projects at multiple sites – with work going on at many different sites, with different teams, the management of money coming in and cash going out is difficult and won’t always be carried out in a uniform way.
- Record keeping and ad-hoc spending – without an agreed accounting process or central system, it’s hard to keep tabs on what you’re spending money on, and why ad-hoc costs are being incurred on some jobs.
- Managing stock control – for the business to function, you need raw materials, tools and plant in stock to complete the job. Every bag of cement that goes missing is a drain on your cash flow, so inventory control is vital.
- Labour and payroll – you need workers to carry out the job, and that means up-front payroll costs to hire the labour needed, and additional labour costs if the job runs over or needs more hands on deck to meet a deadline.
- Quotes and estimates – estimates and bidding for jobs are time-consuming and often not wholly accurate. If your quoted margins and cash flow forecasts aren’t precise, your costs will run over and your profits will suffer.
- Poor financial control – to keep a handle on your finances, the business needs to constantly monitor cash flow to check for potential issues – and run cash-flow forecasts to look for the pitfalls that may lie ahead in the months and years to come. It’s also vital that all costs are allocated to specific jobs and sites, allowing you to drill down into the spending.
As you can see, keeping the business making money, bringing in the right income and delivering positive cash flow is no easy task. But there’s a core reason for many of these cash-flow issues – and that’s a lack of systemised accounting processes and recordkeeping.
The need for real-time control of your finances
If you try running a construction business with no clear overview of your finances, and no ability to track spending and ad-hoc costs, you’re going to struggle.
The way to overcome this problem is to improve the view you have of your accounting data – and the easiest (and most effective) way to do this is to move your business to a cloud accounting platform, such as Xero online accounting.
Moving your finances to the cloud has a huge number of benefits for the effectiveness of the business as a whole:
- Centralised accounting – all your income and spending is centralised in one place, within an accounting solution, that’s accessible to everyone on the team.
- Mobile access to numbers – because Xero’s a cloud solution, you can access your accounts, quotes, invoices and aged debts straight from your phone. So if you’re on site, out with a client, or between jobs, you can always see your exact financial position.
- Record costs and expenses on the move – the Xero app allows you and your workers to record every cost and business expense from your phone, so there are no lost receipts and scrappy bits of paper to account for.
- Track costs by code – one fundamental benefit is the ability to code every transaction and set up cost codes for each job, site and location. So you know exactly what was spent on each project and when – helping you to improve the accuracy of your estimates and be able to control margins and overheads.
- Integration with other business apps – with a system like Xero in place, you also have access to a huge variety of business apps and helpful cloud tools. So you can expand your business systems and deal more effectively with the specific issues faced by a construction business.
What cloud technology does is remove the mess, the disorganisation and the fractured nature of your accounts and bookkeeping. Instead of piles of paper receipts and a multitude of half-completed Excel spreadsheets, you have one central location for all your financial information.
And that’s a huge bonus when it comes to overcoming the cash flow challenge and working more effectively with your accountant.
Getting full control of your accounting data
Xero provides you – and everyone involved in sales, spending and finance within the business – with a crystal clear financial dashboard. So you always know what’s in the bank, how much you’re spending and what outlay you’re going to have in the future.
Instant online access to your accounts also makes it easier to collaborate with your accountant and other business advisers. By logging into your accounts, your accountant can see the self-same numbers in your dashboard – and that’s incredibly useful when you need advice, or have a financial problem to deal with.
Square Mile isn’t your average accountancy firm. We’re cloud-based business advisers who specialise in advice and support for the construction industry. As certified Xero partners, we always aim to deliver real value for clients, and Xero’s ability to code and track your accounting data is one area where we can help you get a better grip on your financial management.
By getting to know how your construction business works, we can help you set up the right codes in Xero and track numbers for every single element of the business.
Tracking these metrics and KPIs over time allows us to measure your performance, and by working closely with you and your management ream, we’ll help you look out for any possible issues that are appearing in your finances – and come up with a speedy resolution to any problems that appear on the horizon.
So when you’re scenario-planning and making big decisions about the future of the business, we’re there to provide the important numbers, key forecasts and informed business advice you need to make the best possible choice for the business.
Talk to us about moving to the cloud
When you combine cloud accounting, with the right selection of business apps and a great business adviser, you’ll get the absolute best from your construction business.
If you’re looking to overcome your construction cash flow challenges, book in a session with the Square Mile team to see how we help you get better control of your accounting data, KPIs and financial future.
Get in touch with us to arrange a chat about switching to the cloud.
In our next blog, we’ll focus on how to work effectively with your business adviser, with 10 key questions a construction business should be asking their accountant.