13 Actions to Improve Cashflow
While it has been said many times, it remains true that the Australian construction industry is not having an easy time in our current economy. It is also true that inadequate cashflow sees more construction businesses fall over than does inadequate profitability. In today’s unpredictable and tough economy, cash really is king.
Though a project’s success is measured on gross profit, active and timely cashflow management during the project is the key to success. Also, while cashflow and profitability are definitely separate factors, there is almost always a strong correlation between good cashflow and good profitability on projects. Plus, with credit increasingly difficult to come by, demonstrating that your organisation has adequate cashflow can assist in securing access to credit.
Cashflow is one of the most vital measures of business performance.
Here are 13 ways you can start to improve your cashflow from today
1. Build relationships
When you are working with people you have dealt with before, who trust you and who value your work, the usual project hold-ups that influence your cashflow can be streamlined. Getting budgets, compliance documents, variations and change orders approved is always easier when you are dealing with an organisation with which you know you work effectively. The value of building relationships obviously extends to many aspects of business, cashflow is just another reason.
2. Know and amend processes
Know what processes are the most important / cause you the biggest headaches in terms of cashflow. Once you can see where cas flow inhibitors exist, you can amend or add to these processes to better encourage ideal outcomes. For example, taking any action that sees billing and variations known and approved faster should be added. This might include having at least weekly meetings with the project’s key stakeholders and approve where possible works completed, scheduled work and potential variations as forecast.
3. Redesign your billing process
Have cash coming in from early on by including an item such as project drawings and schedules as one of the first billable activities that happens on a project. Separate significant material procurement in your billing so that you can get paid for these items as soon as they arrive on site. Put your gross profit into activities that happen earlier in the project lifecycle. Make one of the first things you do be to find out your client’s preferred billing format and ensure your format aligns with this – this can prevent hold-ups throughout the entire project.
4. Streamline variation processing time
Sure, variations can sometimes be good for profitability however more often than not they do not achieve a very impressive profit margin considering the disruption they can cause. This being said, if you can gain the extra profit minus a significant disruption, there is opportunity in variations. Some common ways to streamline and capitalise on variations can include:
• Knowing all the stakeholders involved in approving the variation. With this knowledge you will know who to chase up and how to best ensure they sign off in the fastest way possible.
• Ensure there is a time frame around variation approvals. If no time frame is stipulated in the contract, insert your own.
• Enter a potential variation into your project log as soon as you identify a potential issue. Then bring this up with necessary stakeholders for their buy-in at the next meeting.
• Get the variation ready for billing as soon as it is approved.
• Build a culture that sees pricing variations viewed as a top priority within your company.
• Attach all documents that support your variation order in one PDF to avoid them getting lost or missed.
5. Be proactive with issues
Note issues on your issues register when they happen and note the action taken and associated cost as soon as you know it. Then review this with necessary stakeholders in a timely manner and agree on it as you go. For example, say a contractor accidentally knocks down a brick wall that was built – note the incident when the bricks are on the ground and bill for the fixing of the brick wall as soon as it is re-built and standing again. This then minimises the risk that an influencing party will not “remember” the same things come project close. Never wait until the end of the project to address issues.
6. Negotiate payment terms
Ask for payment terms that suit your cashflow. For example, a four or six week payback structure for materials and supplies might be more ideal than a one-off payment upon receipt of all goods. Spreading the costs of the materials over a longer period of time will lessen the impact to your cashflow.
7. Redesign sub-contractor and vendor pay schedules
Integrating the pay schedules so that money coming in covers money going out is the goal you want to achieve. Design your pay and billing schedules to best achieve this.
8. Be the master of documentation
Stay on top of all compliance and required administration documents and ensure that those who are responsible for securing them are aware of their responsibility well in advance. Having inefficient processes around administration and compliance issues almost immediately negatively impacts your cashflow and can create a perception of poor customer service. Also, mapping out the approval and administration processes and their impact on cashflow should take place at the pre-project meeting so they can be proactively handled and expedited.
9. Manage all documents electronically
Electronic management of documents means the people who need the documentation can access it whether they are in the office or elsewhere which speeds up your processes and therefore assists cashflow. It also sees documentation far less likely to be lost, damaged or overlooked.
10. Shop around sometimes
While a trusty supplier is important and loyalty to one supplier can be beneficial, the best price and terms are also important. It is recommended that for big-ticket items, you secure quotes from three suppliers to ensure you are getting the best deal. For these items, it may sometimes be a smarter decision to lease rather than buy. Leasing requires less short term cash however, if purchasing, ensure you can pay off any loans in a way that avoids significant finance charges.
11. Streamline close-out processes
For most projects, even the very final stages see a significant portion of payment still held by the client – and the length of time it takes for this money to be released will impact your cashflow in a big way. Communicate clearly and accurately with your sub-contractors, vendors and project team to ensure everyone knows exactly what has to happen to close the project as efficiently as possible. Start the close-out process as early as possible – a big chunk of the necessary documentation can be completed once all submittals are approved.
12. Build a culture around improving cashflow
Share your ideas and the points from this article, brainstorm ways to improve cashflow and streamline your projects. Then run a training session on how to achieve the ideas generated in the brainstorming session and demonstrate the correlation between profitability and cashflow to your people. Reinforce this new focus by having your compensation system take cashflow and expedited close-out into account.
13. Predict and control cash flow
Frequent creation and review of cash flow projections allows you to better predict and control cash coming in and going out of your organisation.
Seem like a lot of work? ERP can streamline many of these steps for you and truly enhance your business.
Here’s how ERP can help
1. Included in all good construction-specific ERP systems are the cash management tools you need to create your cash flow projections. Projects are often based on a prior period’s actual figures and make adjustments for variations. This saves you time, increases accuracy and allows for effective forward planning. It also allows you to see how decisions made and actions taken affect cash flow and profit, so your business becomes focused on constant improvement.
2. Your ERP system will ensure your books are accurate and up to date. With the push of a button you can know your real-time financial position, including what cash is on hand. This kind of knowledge clearly shows which invoices to chase up and gives you peace of mind that you can afford the wages and bills scheduled to come out.
3. An ERP system will allow you to more easily manage billing and expense payments so that you maximise your cashflow while reducing penalties and finance charges. This directly impacts your bottom line in saved fees and reduced admin hours to find and sort out this information.
4. Your ERP system will track your inventory and help make equipment orders more cost effective.
5. A construction specific ERP system will have the capability to automate backcharges. This way, as the subcontractor claims for the remedial work, a backcharge invoice is automatically directed to the offending party and the backcharge sum then comes out of the next payment. This means no backcharges fall through the cracks.
6. With the automation and capabilities built in to an ERP system, you will be able to cut back costs around administration, rework and more – the saving of course mean less money going out.
By taking the 13 actions listed above, you will be well on your way to significantly improving your cashflow. Utilising your existing ERP, or implementing an ERP system, will assist you to take these 13 actions in the most streamlined way possible.