Whether you are looking to grow, or just looking to improve efficiencies, managing your cash will make a big difference to your business. There is a reason they say ‘cash is king’. It is the lifeblood of any business [particularly in the building and construction industry].
Here are our top 5 tips for managing your cash:
debtors and creditors
Managing your debtor and creditor terms is a simple way to free up more cash in your business.
For debtors, this means being aware of when you reach the billing stage of a job and making sure you issue the progress claim to the customer as soon as possible. This starts the clock ticking on your debtor period allowing you to chase payment earlier. Keep a close eye on any overdue debtors and engage in conversation with them as soon as possible to manage the debt together.
For creditors, this means utilising your full payment terms. Why pay $10,000 to a supplier after 7 days when your payment term is 21 days? [Just don’t leave it too late as you need to balance this with maintaining good relationships with your suppliers]. A good relationship may mean discounts on early payments, bargaining power on price or maybe even some goodwill if you can’t make a future payment on time.
Remember, it is now a financial requirement of the QBCC to pay all undisputed debts as and when they fall due within trading terms.
manage the business cycles
Anyone in the industry will know that business activity goes through cycles, whether on a yearly basis or in line with the general economy. Most commonly, we see a slow period over Christmas and New Year. Managing these cycles effectively can mean the difference between success and failure.
It is important to a have a strong lead up to Christmas converting revenue into cash so that when the closure hits you are able to pay the bills that continue coming. Generally, it’s a good idea to work on a 10 month year. That way, you can remain sustainable overall, even if you record a loss during the Christmas period.
bank cash in the good times
The last 10 years have shown us that good times don’t last forever. Those businesses that understand this are the ones who can survive the downturns and take advantage of the upturns which inevitably follow. We saw many building and construction businesses go under in the GFC, or were forced to downsize and did not have the capabilities to work on bigger projects when the economy turned around. Those who banked cash prior to the downturn were able to withstand the bad times and take advantage of the opportunities on the other side.
keep an eye on the future
Businesses can sometimes get caught up in the here and now. Yes, it’s great that the business has solid work for the next 4 months, but what about beyond that? Is there steady work on the horizon, should you focus on downsizing your overhead structure to accommodate reduced revenue, or should you focus on getting more work through the door? A little forward thinking can avoid cash flow disasters where you simply don’t have enough work to support your overhead structure.
drawings by owners
From our experience, one of the biggest drains on cash flow of the business are payments made to owners or directors. This can take varying forms including wages, superannuation, drawings, dividends or other benefits such as motor vehicles. While it’s important for business owners to receive a return from the business which is appropriate for the level of risk they are undertaking, this must be balanced with the cash flow requirements of the business.
There is a saying that you should never spend more than you make. In business that means that your cash profit needs to be sufficient to cover any additional drawings or dividends. Strong businesses are the ones who reinvest surplus cash in the business either in business assets, cash on deposit or in assets that will increase in value.
Managing cash flow is critical to any business. Do it right and you will not only sleep easier at night, it may actually improve your bottom line.
For more information on growing your business please contact Josh Smith or your regular contact at businessDEPOT.