5 Ways to Help Cash Flow Management in Construction

Posted by Capify on 13th October 2021 -

At some point, every business owner will have to deal with unexpected costs from things like:

• Operational failures
• Late payments
• Increased supply chain fees.

These factors all impact cash flow within a company and are a pain point for many SMEs across the construction sector. 

Cash flow is one of the most important elements of a successful business and positive cash flow enables growth as well as peace of mind. It ensures wages get paid, operations run smoothly and offers a level of confidence in the future.

However, we know that in the construction sector maintaining strong cash flow can be particularly challenging. A recent survey revealed that 1 in 5 construction companies say cash flow is a constant problem, as well as 84% of construction companies reporting that they have regular problems with cash flow.

Why is cash flow management so important in construction? 

Construction projects have a lot of moving parts, and cash flow ensures all of these factors can work together without delays. Construction firms will most likely be managing several projects at a time, each with different employees, suppliers, schedules, and equipment that can require upfront investment to get the project moving.

Of course, relying on everything to work seamlessly isn’t always possible, and weaknesses in the supply chain could have a knock-on effect on cash flow. This is why business cash flow loans are often a common solution – essentially, construction firms need to be on top of their cash flow to make sure their operations can keep running and they can see a healthy level of organic growth in their business.

What challenges do construction firms face in 2021?

Aside from the challenges of COVID-19 and the global pandemic, a number of other factors are of particular note for construction companies. They include:

IR35 changes

From April this year, the responsibility for determining the employment status of any contractor and personal service company (PSC) was placed on medium and large employers rather than on the contractor.

The change was significant for organisations across all sectors, but particularly for construction firms, of which many will engage directly with contractors, such as painters, decorators, roofers and many others. As a result of these changes, firms have experienced disruption in their supply chain, reduction in the availability of talent, increased tax liabilities and increased compliance costs – all of which put a dent in healthy cash flow.

Brexit

Construction firms rely on supplies, equipment, and materials from Europe and overseas. However, with increased custom checks and more restrictions due to Brexit, construction firms have faced delays, shortages and an increase in costs. In fact, it has been reported that material prices have increased by 20% on certain products.

VAT reverse charge

One of the biggest challenges the sector is facing this year, particularly when it comes to cash flow, is the introduction of reverse charge VAT. Sub-contractors no longer receive VAT payments for their services, unless they are working directly for the end client. Instead, they will reverse charge it on invoices with only the main contractor collecting the VAT from the client to pay HMRC.

As a result, sub-contractors could see 20% being stripped from their incoming funds – money which may have previously been used to assist with cash flow ahead of their quarterly VAT return. It’s been reported that some firms have faced a three-month cash flow hit due to the new VAT reverse charge.

With all of that in mind, what steps can construction companies take to avoid cash flow challenges? Here we explore five things every construction business should do to protect their cash flow…

1. Always ensure a healthy reserve

Establishing a suitable cash reserve will ensure that there are no missed opportunities or delays. Keeping a healthy level of cash flow will allow your business to keep up with current projects efficiently and to a high standard without the need for any pauses.

On top of that, maintaining a healthy cash reserve will give you the ability to buy certain materials, pay salaries, fund new projects, and expand wherever necessary. A lack of cash may result in missed opportunities to take on other projects, stick to timelines and boost growth.

2. Establish a clear and effective cashflow forecast

Creating a cash flow forecast may seem like a complex idea for dealing with the future needs of your company, but it does not necessarily mean it has to be difficult. The most efficient firms, big or small, plan ahead by creating long-term construction cash flow projections.

Predicting future income, costs, and day-to-day transactions can allow you to identify and mitigate potential cash flow problems more easily and put steps in place to better maintain healthy capital.

For example, seasonal fluctuations in the construction industry are well known, so a construction firm can expect to receive more projects during the traditional summer works period than in the winter. A cash flow forecast can help a firm segregate the different costs and income predicted for various seasons and businesses that do this effectively often see the benefits.

Forecasting uses data, which is usually taken from your own trading history. This data can give you an indication of your future, and the direction your business is going in.

3. Day-to-day cash flow management

Day-to-day management of cash flow is important and it’s a good idea to ensure all of those that have some influence over company income and expenditure are working closely together. Setting a shared goal of reducing costs and maximising income, particularly among site managers who can influence financial decision-making with each transaction, can ensure your workers help get you closer to your business goals.

Our guide to SME cash flow management is a useful resource for more information and highlights how cash flow is the lifeblood of operations.

4. Establish good relationships

Working collaboratively with clients to agree workable contracts, timelines, and payment terms can be beneficial and the power of these things combined should not be underestimated.

A major part of successful cash flow management is the ability to delay payments to creditors when necessary and conversely, to shorten waiting times for income. Speeding up payments sometimes means encouraging customers to part with their money before the end of the invoicing period and negotiating with creditors to allow you to keep your money for as long as possible.

Here are some effective methods to establish good relationships with clients and suppliers:

• Consider offering discounts based on early payments
• Stage payments made at pre-set times to set construction schedules
• Always carry out due diligence on suppliers and clients
• Negotiate with suppliers on payment terms to suit your business
• If you are struggling, call up creditors and re-negotiate terms as soon as possible

For times when you have invoices outstanding that you are struggling to get payment for, you might consider outsourcing to a debt collection agency which can help you chase late payments or using an invoice financing product that allows a business to use its unpaid invoices as collateral for financing.

5. Understand when you may need financing

The working capital required in the construction industry to survive and thrive is highly sought after. Whether you are a small business looking for a valuable cash injection to help you pursue a big project, or a more established firm requiring additional finance – cash flow loans and more specifically construction financing can provide much-needed working capital when you need it.

Cash flow loans for small business

With Capify, you can raise between £5,000 – £250,000. Capify also offers innovative construction loans, and funding methods, that are sure to be right – whatever type of finance you need.