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5 Cash flow mistakes that can destroy your construction company

5 Cash flow mistakes that can destroy your construction company
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5 Cash flow mistakes that can destroy your construction company

Did you know in Australia 1 in 3 new businesses will close their doors in the first year? 

1 in 3…

And 41% of these attribute their non-success to inadequate cash flow? They are some frightening statistics!! …cue “Psycho” shower scene music…

So, now you understand just how massive cash flow management is in ensuring Australian businesses thrive or die, let’s discuss the top 5 errors construction organisations are making daily. 

Failing To Consider Payment Timing 

In Australia, it takes on average 54 days for a business to pay its bills. ON AVERAGE. 

So your customers may take longer. Let’s think about this in a real-life scenario. You have a customer who has an invoice with 30 days payment terms for some concrete; however, they don’t pay for 60 days. In the meantime, you continue selling to this customer – increasing their debt to you and paying your suppliers for their goods – probably earlier than your customer is paying you –even more debt. 

This cycle results in a cash flow deficit that you have to finance somehow. Can your business carry that burden for one, ten, one hundred customers? Or will you have to work in a line of credit to keep your business alive while waiting for your customer payments? 

Even if you do this, there will be finance charges involved – are you recouping these fees? Instead of creating a bad relationship by charging late fees and making tough phone calls – maybe you could allow for that slow payment in that customer’s pricing. Ensure you bundle any fees and charges you need to cover into their personal schedule of rates. 

Billing Fully In Arrears

A lot of businesses make this mistake, don’t leave it to learn the hard way! Asking for a full or part payment in advance can help your cash flow and your ability to pay your bills. Even large companies face difficulties around cashflow and can be slow to pay their bills or even walk away, not paying for the services you have already provided. Basing your payment structure on dates or stages of a project can help you space out your payments and ensure a steady injection of cash into your business. 

Not Looking Critically At Each Expense

Every expense, especially for small to medium enterprises, needs to pay for itself. How will this purchase increase your productivity or reduce your costs? Recurring fees are the ones that cause significant strain on business cash flow – so look at services you pay for regularly and assess how they are adding to your business.

Looking at each expense in this manner will allow you to stop spending on unnecessary purchases.

Relying On Your Bank Balance For Cash Flow Insight

Oh, no, no, no! 

Bank Balance and Cash DO NOT EQUAL cashflow and profit. While cash IS king, your bank balance is not a representation of your actual cash position.

The smart construction business owner should look at forecasting accounts payable, receivable, payroll, and expected revenue to gain an accurate reflection of where their business is heading. It is imperative to have an idea of where your business is positioned several months in advance. 

Waiting for your external accountant to get this info to you in hindsight is pointless; your business can go under before getting that to you. Forecasting your cash flow is crucial. 41% of all companies that fold in Australia account their closure to inadequate cash flow. 

Get ahead of the problem and gain clarity on how your future profitability is looking. 

Not Leaving Enough Room For Contingency

We have all experienced it; things take way longer than they were meant to. Whether the shipment got held up somewhere, someone didn’t put the right paperwork in, or there were delays in the manufacturing process, it is super important to have cash in a contingency budget due to all these things outside of your control. 

Having a contingency budget will allow you to deal with these unexpected changes in payment schedules or give you the ability to jump on an opportunity if one arises. You may secure a miraculous partnership that you would be crazy to turn down but will need to hire more staff to cover it immediately – you need cash; otherwise, you would have to walk away from the chance.

If you feel that your business could use some help in gaining better data and insights into your cashflow – give Thrive a call today on 1300 868 474, our team of experts are here to help your business thrive and not become another statistic