Cash flow is the key to business survival
It’s a well-known fact that cashflow issues are overwhelmingly the biggest cause of business failures, even without the additional pressures the Covid-19 pandemic has heaped on the economy.
Yet, as sites have re-opened and construction has got back to work, it’s all too easy for businesses to focus on getting their work done and making up lost time, rather than discussing and re-negotiating that vital payment cycle.
Payment schedules are essential to the professional management and well-being of any business and are every bit as important as winning the contract in the first place.
As we face a post-Covid-19 recession, it is the most agile and adaptable businesses that will survive and that includes effectively managing the risks associated with payment security.
Develop a robust payment forecast and schedule
Once you have agreed a price for a contract, or an additional piece of work, you need to develop a robust payment forecast and schedule. This involves planning out what your business needs, such as budgeting for ordering materials in advance and ensuring you have sufficient cash to deal with operating costs and re-investment costs, as well as a contingency to allow for unavoidable delays.
It is critical that customers pay the agreed amounts on time and part of this is good, ongoing communication. Payment terms are usually every four weeks, so you need to ensure that, before the payment is due, you provide your client with a valuation of that four weeks’ work.
When additional work is required, this needs to be costed, agreed and added to the payment schedule.
Negotiating credit limits
A major part of managing your cash flow is negotiating credit limits with key suppliers. We have recently seen issues arising with suppliers’ insurers refusing to cover large amounts of credit.
So be clear about payment terms when negotiating with suppliers, don’t get caught out by unexpected payment demands.
When high cost materials or large expenditure items need to be ordered in advance, you may be able to negotiate a vesting arrangement with your client, whereby the materials are purchased, inspected and confirmed to be fit for purpose by the client. They can then be paid for in advance and securely stored on or off-site until their use for that project.
At ProQS, we can help you with cash flow forecasting and negotiating payment terms with your clients and suppliers. We appreciate that in the construction industry, many business managers’ skills and energies are on the project side, not necessarily the financial side, but forecasting and planning out expenditure is often the critical difference between success and failure.
or call us today on 01206 654003