Builders and their cash flow troubles (and how to resolve them)
The construction industry in New Zealand is going through a rough patch at the moment. High interest rates are causing a tightening of wallets and purses down the whole chain. This is not news to you though. Cash is tight. Lets better understand why and how to resolve the problem.
You want to maximise your cash collection and minimize your cash outflow – simple right?
Strong cash flow is tricky in the building game as builders are often paid in lump sums through the year. Builders also work on relatively small gross margins, so if things go wrong, you can quickly find yourself in a bit of strife. This makes cash-flow planning evermore important.
If you’re in a bit of a cash crunch, here’s what you can do NOW:
Maximise the deposits your are taking from new jobs
Stick to your specialty; don’t go looking for the exciting new job that you may price incorrectly
Chase those invoices that are overdue; issue a statutory demand if necessary
Reduce tax payments as much as possible
Get your financial systems running properly
Maximise the deposits you are taking from new jobs
Start small and communicate with your client. If you usually take a 20% deposit + materials, take 25% + materials.
You could also work out what your monthly cash outflows are and ask for the usual deposit plus a months’ worth of cash outflow. Then at least you know you’ll be good for the next month.
Everyone is signing up to subscriptions these days, so clients are used to this pricing model too. Instead of billing based on completion, try and agree to a monthly fee. Break down the total job quote into however many months you expect the job to take and get your client onto a direct debit order. There are many payment merchants out there that offer this. I use GoCardless and it works well for me, it might work for you too? No more chasing invoices.
Stick to your specialty
I understand the desire to take on the new job that you’ve gone out to quote. It gets you excited, it’s going to push the limits of you and your teams capabilities, it gives you goosebumps thinking about it. Jobs are harder to come by these days.
But hold on.
Unless you are crystal clear that you can price the job properly, ensuring enough margin to cover all outgoings including your drawings, don’t do it.
Spend the time upfront to make sure you have got your costings spot on. Communicate with the client about this. Be transparent, open and honest and you will be respected for doing so. A client that doesn’t respect this is not a client you want to be working with.
Ensure there is leeway in the contract for overruns or unexpected surprises. Shift this liability onto the client.
Don’t underestimate the impact of getting your costing wrong.
A $1.5mn build at 20% margin will leave you with $300k, vs 10% at $150k.
That lost $150k could mean you don’t make payroll next week, or can’t pay the mounting supplier invoices that fall due in 60 days. Be careful.
Chase those invoices that are overdue
If you’ve got past due invoices, get on the phone or visit the client and ask for payment. Explain the situation.
It’s tough because they were contractually obligated to have paid you already. Grit your teeth and show them compassion anyway. Figure out a payment plan with them.
If this doesn’t work, you might need to issue a statutory demand. This requires the client to repay you within 15 working days or else you have the power to force them into bankruptcy or liquidation proceedings.
Reduce tax payments as much as possible
Unfortunately the tax man is going to have to wait.
Assess your provisional and end of year tax obligations. You should have received a summary of these from your accountant for the current financial year when they did your most recent set of books.
If trading has slowed down compared to last year, chances are you will be able to pay a lower amount of provisional tax.
Communicate with your accountant and ask them to work with you to prepare a projection of your profit and loss for the next 6 months.
If you’ve been setting aside income tax and GST in a separate bank account, you are probably in an ok position, but get clear on profitability and you may be able to save some of this cash.
If you’re falling into tax arrears or you weren’t able to quite make up the latest provisional tax instalment, get talking to Inland Revenue and request an instalment arrangement as soon as possible. IRD is currently charging interest of 10.81% on unpaid tax, plus penalties of 5%, so they are a very expensive financing option.
IRD are good to work with. They are flexible and will listen to your plight. You can get an instalment arrangement in place to repay your taxes over the next 24 months (usually the max, but they may extend to 36). The catch is that you must meet your future tax obligations in full. That 6-month projection is ever more important.
Another option is to get yourself onto a PAYE salary rather than taking drawings. That way, the tax is paid at the time you take your drawings, and you’ll end up thinking about tax a lot less. How good is that. I wrote a whole article on how to do that here.
Get your financial systems running properly
The amount of money builders leave on the table because they forgot to invoice for a job or a particular stage of the job is staggering.
Invoice as soon as you can. Don’t wait.
At least get the invoice into your system so you won’t forget about it and you can chase for payment at a later date.
Get your supplier invoices into the system as well. You want to know when these bills fall due. No surprises. Surprises will hurt you and your relationship with them. If you know what bills are in the pipeline, you can plan ahead against your expected invoice payments or at least speak to them in advance of the due date.
Be careful out there. A little bit of cash-flow planning will go a long way.