Financial challenges in business are constant and those of us in the building industry face a multitude of hurdles. Most recently we’ve seen the fallout from the Royal Commission into misconduct in the banking industry, with the effects being amplified by COVID-19. With banks cracking down on lending, it has been harder to borrow money, and this has resulted in fewer property buyers and house price falls.
Given that downturns can increase financial pressure for some businesses, Dahlsens has reached out to finance expert Harry Pontikis to provide advice to help builders weather the storm. If you feel you could do with some quick financial thought starters to stir you into further action, read on.
Knowing how much money you have available to cash flow the business is an essential first step. Understand the limitations your financial position places on your business to ensure you don’t take on jobs that bring unnecessary strain.
Here’s a few ideas to consider when assessing whether or not you take on a new project:
- Calculate the cash flow requirements of a project by taking the total value of a job and dividing it by your claim method. For example, project value – $2m / stage claims – 30%. If a particular stage is, say, 30% of the total value of the contract, the amount you’ll be owed during a stage would be $600,000 (30% of $2m). Will your business have the cash flow to cover this?
- If the client disputes the work or is unable to pay, and a delay of a few months would send you broke, you might want to reconsider taking on jobs of that value
- If a single job going bad will break your company, then reconsider it. If doing a large job means you’re unable to do other jobs or if you don’t have alternate funding sources, the risk of this job is larger
Calculate a project’s cash flow requirements
If you can, ensure that every job has a cash flow report. Using a construction program for live tracking or the manual method outlined below, you’ll be able to plan for funding shortfalls and more easily iron out the massive cash flow peaks and troughs which are so common in the
A cash flow report can be created using an excel spreadsheet:
- Add the scheduled work forecast to occur onsite
- Forecast the costs of this work (usually labour + materials equipment)
- Predict claims to be paid according to the work schedule
- Subtotal the positive or negative cash flow impact
- each week
Borrowing money for your business should not be a drip-feed process. It is recommended that you raise the maximum amount you need in one go as you may not get another chance.
Lending conditions have transformed in the past few years, compounded by the Royal Commission and now COVID. Approaching a bank directly may not be your best bet to get the most favourable deal; the bank won’t confess if their offer is non-competitive.
Instead, you may wish to consider a finance broker who can help you review offers from a range of lenders.
Renegotiate current loans
With interest rates at record lows, it’s a great time to seek and negotiate interest rate discounts. If your rate appears high compared to advertised rates, speak to your lender about reducing it. There may be gains to be made by contacting an independent credit advisor or finance broker to
help you get a better deal.
If you need a loan, make sure it’s the right type
Calculate how much you’ll need and how long you needit for. Re-mortgaging your house may not be suitable if you need money in the short-term. If you need money for equipment, you may consider renting or leasing options.
There are many finance solutions available and it’s about knowing which options best suit your needs and give you cash flow flexibility.
Set strict payment procedures
A sale is not final unless it’s been paid. Have procedures in place to collect money owed to you and aim to reduce your exposure when people don’t pay.
- Payment terms should be included as a condition of every building job
- Ensure you have the correct contract in place for each project
- Utilise the advice and contract templates available from associations such as HIA and Master Builders
If you aren’t aware of the terms of the security of payments legislation, you may like to understand the following: if an invoice isn’t challenged in the prescribed way or during the 10-day period after the builder receives it, the full amount of the invoice is usually payable.
If this surprises you, contact the Victorian Building Authority on 1300 815 127 to discuss specific scenarios.
Have debt collection strategies
Do you regularly call the companies who owe you money before their monthly payments are uploaded each month to make sure your invoice is part of the next pay run? Failing to do this may lead to a delay of another month.
Having clear targets for your accounts receivable team will also assist in recouping funds.
Be realistic with your forecasts
Forecasting requires a certain amount of estimating, but spend the time to ensure your figures are accurate and realistic.
Base your forecasts on the figures you’re likely to achieve. Be disciplined at making forecasts on a monthly basis. If cash is tight, forecasting should be done on a weekly (or even daily) basis, setting plans to address variations to your forecast.
If you allocate job codes or cost codes for every expense and for every project you will achieve accurate reporting of the costs, and consequently the profit margin, of each job.
A centralised and controlled bookkeeping method will allow your suppliers to help you manage your materials and equipment, rather than having an ad hoc method where the site supervisor orders materials from the closest supplier.
Don’t sabotage your business
You’ll be aware of many good businesses that have been sabotaged by their owners’ spending. Siphoning money from the business to renovate their own homes, go on holidays or buy impractical vehicles doesn’t always end well.
Similarly, allowing your business to operate with the funds it earns rather than taking money out so you don’t pay tax is often a death sentence to the long-term viability of a company.
Rather than solely focusing on tax minimisation, sit in the driver’s seat and prepare to ask your accountant questions regarding profitability. For example, if your accountant suggests you buy a piece of equipment to minimise your taxable income, challenge your accountant and understand
if they have considered your business’ cash flow requirements for the coming year based on the projects you’re planning. If the response is blank or unsure, you may wish to take control and analyse your future year’s cash flow requirements before investing in expensive machinery.
And remember… everything’s negotiable.
Don’t be afraid to negotiate the interest rate on a loan, the fees and charges quoted and everything else in between.
It never hurts to ask for a better deal.
Harry Pontikis is Director of Chocolate Money, a finance and mortgage broking firm for the building industry.
Chocolate Money holds an Australian Credit License 387277.
Please note: the information provided is general in nature and not to be considered specific advice.