Construction Insider Logo

Construction Insider
Magazine

Get Access to the Construction Insider Magazine, Saint Sunday and Exclusive tips & tricks to scale your business.

You're all set!

Thank you for subscribing to the No.1 Construction magazine for construction businesses.

Oops! Something went wrong while submitting the form. Please check your email and try again
Close

We Use Cookies! Learn More

Sounds Good!
6 Finance Points To Help Your Business
Construction Insider logo

6 Finance Points To Help Your Business

Day / Night Icon
Construction Insider - Arrow Left
Back to the Toolbox

💸 Managing Cash Flow

Operating Cash Flow is a crucial aspect of managing cash flow for a construction company in the UK.

While revenue is important, what really keeps the business running smoothly is the cash that's available to cover day-to-day operations.

Late invoice payments can indeed be a major challenge, particularly when dealing with slow payers or larger clients who impose extended payment terms like 60 days.

This delay in receiving payments can create a strain on working capital and hinder your ability to meet immediate financial obligations such as paying suppliers, covering payroll, or investing in new projects.

Using the Operating Cashflow Report will give you a basis to see how the operation side of your business is running. Negative operating cash flows, period after period, may signal that cash will become insufficient to cover expenses or other obligations.

🚧 The Quick Ratio

The Quick Ratio is a KPIs to see the short-term financial strength of a company.

💡 How to calculate: (Cash + Accounts Receivable) ÷ Total Current Liabilities

This is often referred to as the acid test, it measures what assets that can be quickly converted into cash (liquid assets) to cover short-term liabilities (suppliers, wages, rent etc). Inventory, vehicles and so on are excluded from this calculation.

This metric shows you the business’s ability to ride out short-term rough patches. A quick ratio of above one is considered “safe”. A ratio below one shows the business could be struggling to pay short term liabilities (suppliers, wages etc).

🆚 Accounts Receivables VS Accounts Payables

What is owed Vs What we owe

Managing accounts receivable (AR) and accounts payable (AP) effectively is crucial for the financial health of any construction company. Here are some strategies to help:

Accounts Receivable (AR) Management:

Invoice Promptly: Send out invoices immediately after completing the work or delivering the services. This helps to ensure that your clients are aware of their obligations and reduces the likelihood of payment delays.

Clear Payment Terms: Clearly outline payment terms on your invoices, including due dates and any penalties for late payment. This sets clear expectations for your clients.

Follow-Up: Implement a system for following up on outstanding invoices promptly. Send reminders before and after the due date to encourage timely payment.

Offer Incentives: Consider offering incentives for early payment, such as discounts for invoices paid within a certain timeframe. This can encourage clients to settle their accounts sooner.

Use Technology: Invest in accounting software or invoicing platforms that can streamline the invoicing process and help you track outstanding payments more efficiently.

💡 How to calculate: Accounts Receivable x Period Length ÷ Revenue

Accounts Receivables Days tells us the average amount of days it takes for your clients to pay your invoices.

Accounts Payable (AP) Management:

Negotiate Payment Terms: Negotiate payment terms with your suppliers that align with your cash flow cycle. Aim for terms that give you enough time to pay without incurring penalties but also maintain good relationships.

Prioritise Payments: Prioritise payments to suppliers based on their importance to your business operations. Ensure that critical suppliers are paid on time to avoid disruptions.

Take Advantage of Discounts: Take advantage of early payment discounts offered by suppliers whenever possible. This can help you save money and improve cash flow.

Monitor Cash Flow: Keep a close eye on your cash flow to ensure that you have sufficient funds available to meet your payment obligations. Forecasting cash flow can help you anticipate any potential cash shortages and take proactive measures to address them.

💡 How to calculate: Accounts Payable x Period Length ÷ Total Cost of Sales

Accounts Payables Days tells us the average amount of days we take to pay suppliers, subcontractors etc

By implementing these strategies and maintaining a balanced approach to managing AR and AP, you can improve cash flow, strengthen business relationships, and ensure the long-term financial stability of your construction company.

🗒️ Invoice financing/Credit Insurance

These are two helpful solutions to alleviate some of the pressure caused by late payments/clients going insolvent.  

By using invoice financing, you can obtain a cash advance based on the value of your outstanding invoices. It can help improve cash flow and ensure that you have the funds necessary to keep your operations running smoothly, especially when you know that the client is typically a late payer.

Another option is Construction Credit Insurance which is a safeguard against a specific client or across your whole client base against insolvency. If a client did go insolvent, this trade credit insurance will pay out a percentage of the outstanding amount owed (typically around 90% of the value).

📈 Tracking Gross Profit and Operating Profit Margins

Following on from last week's Media Saint Sunday, we recommend businesses to focus on making jobs as profitable as they can be as often business owners can be drawn into how large the turnover is compared to how profitable the business is, for example, a 2 million turnover business with a 5% Operating profit margin can make the same profit as 500,000 business with a 20% Operating profit margin (60% cost of sales, 20% overheads)

💡 How to calculate:(Gross Profit ÷ Revenue) x 100

💡 How to calculate: (Operating Profit ÷ Sales) x 100

🪙 Cashflow Forecasting

This can often be seen as an impossible mission but if it can provide some light down the tunnel then it is worth the investment (money or time!)

Using software like Float Forecasting will make your forecasting easier in the future but will take a learning curve to get used to the software and knowing what information you need to be seeing but if you invest time you will get the peace of mind you’re looking for.

You can create scenarios based on winning that large project, taking on a new hire, hire purchase of a new van or when is the best time to pay off a large expenditure bill. This can be done on a spreadsheet but it can often be a case of “I don’t know where to start” - Software helps bridge this gap.

Frequently asked questions

Q: Why is operating cash flow crucial for construction companies?

A: Operating cash flow is essential because it ensures that there is enough cash available to cover day-to-day operations. It helps manage immediate financial obligations such as paying suppliers, covering payroll, and investing in new projects, keeping the business running smoothly.

Q: How can an Operating Cashflow Report help my business?

A: An Operating Cashflow Report provides insight into the operational side of your business. Consistent negative cash flows may indicate that cash will become insufficient to cover expenses or other obligations, allowing you to take proactive measures.

Q: Why is the Quick Ratio important?

A: The Quick Ratio shows your business’s ability to handle short-term financial challenges without relying on inventory or other less liquid assets. It helps assess financial health and preparedness for unforeseen expenses.

Q: What is Construction Credit Insurance?

A: Construction Credit Insurance protects against client insolvency by covering a percentage of the outstanding amount owed (typically around 90%). It safeguards your business from significant financial loss if a client goes bankrupt.

Q: What is cash flow forecasting and why is it important?

A: Cash flow forecasting predicts future cash inflows and outflows, helping you anticipate potential cash shortages and plan accordingly. It aids in decision-making regarding investments, expenses, and financial planning.

Construction Yellow Tag
This Article was included in:

This article has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.

PS. Whenever you are ready, here's how to grow your construction business...

1. Join our Facebook Group which built completely for businesses within the construction industry. Real people, real support. - Now also available on LinkedIn.

2. Keep up to date with Construction Insider Providing you with industry insight, tips & tricks and much more to make sure you are ahead of your competitors!

3. When you are ready, Become a Saint Financial Group client, and we will provide you with the highest quality solutions to effectively scale your construction business. Book your meeting here!

6 Finance Points To Help Your Business

Written by the team at:

Saint Global Marketing

Got a question? Ask us here 😉
SaintFG
x
Construction Insider Logo

Grab Your FREE Copy Here!

SaintVA
Saint Accountancy
Saint-Global
The Saints Dashboard
Advertise with us
SaintFG

How To Grow Your

🚧 Construction Businesses 🚧

Get Started With Saint

Construction Insider

How To Invite An Advisor To Xero

How To Invite An Advisor To Xero? We will cover the steps of inviting an adviser to your Xero so you know exactly the steps that need to be taken in Xero and if needed how to remove a user from your Xero account!

Next Article