When talking to our clients in the building, trades and construction industries, one of the biggest stressors they face is cash flow management. For many, the problem is trying to understand the bottom line and how much profit (if any) they have made on a project. For others, it’s the difficulty in being able to predict business cash inflows and cash outflows – especially in the current environment.
That’s why cash flow management is often our focus when we first start working with new clients. But what does cash flow management mean in the real world?
Cash flow management means understanding and monitoring how and when money will enter your business (known as cash inflows) and leave your business (known as cash outflows). This knowledge will allow you to make informed business decisions and ensure you have sufficient money to meet your payment obligations on time.
The 2 key areas of cash flow management
For Australian trade businesses, and the construction industry in general, there are 3 key areas you need to keep an eye on in order to have effective cash flow management. They are:
- Inventory management and materials
There can be great business advantages in buying commonly used materials in bulk rather than in multiple small deliveries. These include:
- The ability to negotiate the price and obtain discounts
- Mitigating the risk of material shortages which trigger project holding ups
- Potentially reducing your delivery cost expenses
However, there are two factors that may negate these benefits. That’s why inventory management is so important. Those factors are:
- The storage costs you may incur while waiting to use the materials
- The amount of money you have tied up because you have purchased materials in advance
Inventory management helps you evaluate the benefits of holding materials vs the risks of ordering as required. When you know your bottom line, you can make solid, business decisions.
2. Accounts receivable and accounts payable
Promptly sending out invoices and strictly following up on late payments will help you keep on top of your accounts receivable. To achieve this, you need to have processes in place that quickly trigger when invoices should be prepared and sent as well as tight procedures on when to chase late payments.
When customers pay on time, you will have funds available to pay your expenses (accounts payable). This reduces the amount of money you need to borrow and pay interest on – improving your cash flow further.
How we help trades and construction businesses
Thriving trades and building businesses require careful financial management and good processes. The Construction Business Navigator Growth Program will show you how to increase your profitability and better manage your business cash flow. To discover more, book your FREE 15 Minute Construction Growth call.