Strategies to Improve Cash Flow for Construction Businesses
As a construction business operator, you’re no doubt facing some challenges.
Recent news reports reveal the Australian construction industry is not in good shape. Several firms have gone under, including Probuild, Condev, Snowdown Developments, Hotondo Homes in Horsham and Hobart, Dwelling Building Group and Merhis Group, according to the Australian Property Journal.
The state of construction
Construction activity decreased significantly in the month to the end of June due to higher interest rates and a shortage of materials. Add to that land and labour shortage, supply chain disruption, COVID waves and the Russia-Ukraine war rattling economies across the globe. Home building costs are ballooning by up to $100,000 per project in NSW.
Up to half of all Australian building companies are trading while insolvent and may collapse, estimated Russ Stephens, the co-founder of the Association of Professional Builders. This is a sector that has operated on thin profit margins for many years.
This article will explain how to improve your business liquidity and cash flow in the current climate of continuing disruption.
The pointy end of a project is the start. That’s when you focus on finding cost and schedule improvements. Doing your due diligence here helps determine if your estimate delivers you a profit or not.
Pre-project planning done well can slim design and construction costs by 20% and decrease the design and construction schedule by 39% against authorised estimates, says the Construction Industry Institute.
Strategies to improve cash flow
Running out of cash is a death knell for construction businesses. For example, even though his debtors owed him $12 million, a regional NSW builder Peter O’Brien Constructions went under when he only owed his creditors $5.7 million. Had the debtors paid, he could have cleared his debts more than twice.
Cash flow is the lifeblood of your business. It helps move projects forward, fund new ones and pay upfront for labour, material, and other costs. On average, it takes 83 days for construction payment to be made, observes professional services firm PWC.
A healthy cash flow is key to liquidity to see you through unexpected expenses, adversity and volatility. Here’s how you can refresh your approach:
Know your net profit and cash flow through analysis and forecasting to allow you to pinpoint cash shortfalls and surpluses
Negotiate with vendors on payment terms (aim for 1.5% to 5%), even perhaps partnering with them, so you’re offering them value
Secure a line of credit from a financial institution to buffer cash shortfalls
Look into leasing or financing fixed assets such as plant and equipment, opting for leasing if your focus is on a steady cash flow
Consider ramping up your technology to better monitor your cash flow. Construction accounting software, including apps to track your debtors, can help give real-time insights into and better control over your cash flow.
Talk to us for tailored cover
Reach out to us for other risk-management strategies to build your business liquidity for the long term. We’ll help you minimise your risk exposure.
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