Construction is a sector with high overheads and a culture of late payment by customers – and that makes cash flow a major headache for most construction businesses. The average firm waits 107 days before it receives payment, according to recent research, and that can mean significant dips in income and cash flow over the course of the year.
As we pointed out in our previous blog, to get real control over your cash flow challenges, it’s vital to have the best possible oversight and control of your accounting data. But there are also plenty of strategic and tactical steps you can take to improve payment times, cut overheads and improve your cash flow forecasts.
And when you work closely with an accountant who knows the construction industry like the back of their hand, you can start tackling your cash issues head on.
To get you started, here are 8 key ways to start proactively improving your cash flow and ensuring your construction business is built on solid financial foundations.
1. Move to cloud accounting
If you’re currently managing your bookkeeping and finances through a mixture of desktop accounting, Excel spreadsheets and piles of paper receipts, we have news for you. Cloud accounting software, such as Xero online accounting, makes all of this redundant.
Xero gives you a cost-effective, simple-to-use accounting solution which you access online. So whether you’re using your phone on site, or your laptop from a customer’s office, you always have access to your key sales, revenue and cost numbers.
With better oversight, comes better financial management. Expenses and receipts can be uploaded straight to your Xero accounts, allowing you to instantly see your cash flow situation and take steps when things are looking problematic.
2. Collaborate with your accountant
Your accountant has a wealth of knowledge and experience to apply to your situation, so talk to them and make sure they’re helping you resolve those cash flow problems.
To help you maintain a positive cash flow position, your accountant can review your financial model, your internal processes and your payment collection and look for key ways to boost income and reduce unnecessary spending.
3. Track and review spending
Reducing the money that flows out of the business is one fundamental way to boost cash flow. And to do that effectively, you and your accountant need to code up your transactions, customise your Xero chart of accounts and start tracking every single cost within the company.
Having a cost code for each job site, and codes for each element of your overhead, lets you see precisely where your money is being spent. If Job A is overspending on concrete, you can see that. If Job B is about to go over budget, you’re aware of that.
It’s this level of granular detail that puts you back in control of spending, allowing you to take action, rein in costs and be more strategic with your outlay – all of which is great news for cash flow.
4. Get proactive with tax planning
Your business tax liabilities are a big chunk of over overall spending during the year. When you’re hit with a big corporation tax bill, or need to pay your quarterly VAT bill, that has a direct impact on the liquid cash in the business.
The way to mitigate the impact of taxation is to plan ahead – and that’s where a great working relationship with your accountant adds immense value.
By identifying the business taxes the company is liable for, you can make your tax plan as tax-efficient as possible. Looking for VAT expenses that can be claimed back, tax incentives that can be claimed and managing your tax payments so they have the smallest possible impact on cash flow, you can make tax work for you, rather than against you.
5. Use online invoicing and payment gateways
The sooner your invoices get paid, the more cash you have in the business at any given time. So making use of Xero’s online invoicing function is a great way to reduce late payments and speed up payment.
Professional, branded quotes and invoices can be emailed direct to customers, straight from your Xero online accounting – completely removing the need for paper invoices and getting you paid 31% faster.
Using online payment gateways, such as GoCardless, PayPal or Stripe, also means customers can pay your online invoice with the simple click of a button. That speeds up the payment time even further, reduces the wasted time you spend chasing late invoices and helps you keep your working relationship with the customer on great terms.
6. Smart-scan your expenses
Messy bookkeeping, lost paper receipts and confusing, inconsistent Excel spreadsheets all serve to slow down your financial management and stop you keeping on top of your cash flow.
One incredibly simple way to resolve this mess is to integrate the Receipt Bank smart-scanning app with your Xero accounts. Project managers and workers can input job expenses straight from their phones, just by snapping a photo of the receipt – with the bookkeeping data all magically pulled through to the right codes and accounts.
With Receipt Bank and Xero in tandem, the cash numbers you see are totally up to date and you can make informed decisions on spending.
7. Get your pricing right
Pricing is such a vital element of making your construction business profitable. If your estimates, budgets and margins for a job aren’t accurate, you’re not going to bring in the revenue needed to keep the business ticking over.
So it’s important to work with your accountant to regularly review your key sales, price and margin metrics and KPIs to make sure your price point is not just competitive, but also profitable for the business.
With a combination of Xero and Futrli cloud reporting and forecasting, you have 24/7 access to your KPI dashboard, meaning you and your advisers have the best possible overview of profit margins, revenue and cash flow.
8. Look to the future!
To keep cash flow positive all year round, it’s important that your focus isn’t just on the here and now, but also on the future of the business.
In a busy construction business, it’s easy to get lost in making sure each and every job gets completed on time, but there’s also huge value in taking a step back and looking at projections of future work, future jobs and future cash flow.
This is where Futrli’s forecasting tools and dashboard are immensely helpful tools, both for you and your management team and for your accountant. By looking at your position in 6 months, 12 months or even two years down the line, it’s easy to keep a handle on cash flow and escape any unexpected surprises that may be lying in wait around the corner.
Get in touch with us to arrange an informal chat with a Square Mile adviser – and let’s see how we’ll help you overcome the cash flow challenge and become more profitable as a construction business.