If you’re running a small or medium-sized construction business (SME) in the UK, managing cash flow is essential. In the construction industry, money can be tight due to delayed payments, unexpected costs, and changes in project timelines. That’s why getting a handle on cash flow is critical to keeping your business afloat. Let’s go over the best practices for managing cash flow for construction SMEs.
1. Make a cash flow plan
The first step to staying on top of your cash flow is creating a forecast or plan. This means estimating how much money you’ll bring in and how much you’ll spend over time. Having a cash flow plan helps you avoid nasty surprises like running out of money halfway through a project.
Your plan should include all costs – materials, labour, and any other regular expenses. It should also account for the money you expect to receive from clients. This way, you can see when things might get tight and plan for it, whether by saving more money or arranging additional funding
Simple cash flow forecast example:
Month | Expected Income | Expected Expenses | Net Cash Flow |
January | £20,000 | £18,000 | £2,000 |
February | £15,000 | £12,000 | £3,000 |
March | £22,000 | £20,000 | £2,000 |
2. Send invoices quickly and clearly
One of the biggest cash flow problems for construction businesses is waiting too long to get paid. To avoid this, always send invoices as soon as a job is done. The quicker you invoice, the quicker you get paid.
Make sure your invoices are clear and easy to understand. Include all the details like the project name, what work was done, and how much is owed. This way, there’s no confusion, and it speeds up payments.
Tip: Use invoicing software to make the process easier. It can even send automatic payment reminders.
3. Set clear payment terms
Setting payment terms is key to keeping cash flowing. Make sure your clients know exactly when payments are due and how much they’ll be paying.
You could set up stage payments where the client pays a portion upfront, partway through the project, and then on completion. This helps keep a steady flow of money coming in during the project.
Example payment terms for a project:
- 25% deposit before starting work
- 50% halfway through
- Final 25% upon completion
4. Keep an eye on your overheads
Overhead costs like rent, insurance, and vehicle maintenance can eat away at your cash flow if you’re not careful. Always keep track of your overheads and look for ways to reduce costs without affecting the quality of your work.
For example, you might outsource tasks like bookkeeping or payroll to save time and money. Or, you could try to get better deals with your suppliers.
5. Use project management software
In today’s world, technology can help you keep on top of your cash flow. Project management software lets you track your expenses and payments as they happen. This means you’ll always know exactly where your money is going.
Tools like Xero or QuickBooks can make invoicing, budgeting, and tracking costs much easier. You can also use them to send payment reminders, so you’re not chasing late payments all the time.
Benefits of using project management tools:
- Track spending in real-time
- Automate invoices and reminders
- Integrate with accounting systems
6. Manage your credit control
Chasing late payments can be a headache, but it’s a crucial part of keeping your cash flow steady. Make sure you have a system in place to follow up on unpaid invoices.
Set reminders to chase late payments and be firm but polite in your follow-ups. In some cases, offering discounts for early payments or charging interest on late payments can encourage clients to pay faster.
7. Build a cash reserve
It’s always smart to have a bit of extra cash set aside for a rainy day. Having a cash reserve can keep your business running smoothly when things get tough, such as during slow periods or when payments are delayed.
Try setting aside a small percentage of your profits during busy periods. This will give you a financial buffer so that you’re not scrambling for cash when something unexpected happens.
8. Negotiate with your suppliers
The relationship you have with your suppliers is just as important as the one with your clients. Talk to your suppliers and see if you can negotiate better payment terms, such as longer payment periods (e.g., 60 or 90 days).
You can also ask for discounts if you’re able to pay upfront or order in bulk. Strong relationships with suppliers can make it easier to manage your cash flow and give you more flexibility when needed.
9. Consider invoice financing
If you find yourself waiting too long to get paid, invoice financing could be a solution. This is where a finance company advances you a portion of the money owed on an invoice while you wait for your client to pay.
This can help you keep cash flowing without the stress of waiting months for payments to come in. However, there are costs involved, so be sure to weigh the benefits against the fees.
10. Review your cash flow regularly
Managing cash flow isn’t a “set it and forget it” task. You should review your cash flow regularly to spot any problems before they become bigger issues.
Set a routine to check your cash flow weekly or monthly. By keeping a close eye on it, you can catch potential shortfalls early and take steps to fix them before they cause damage to your business.
In summary, managing cash flow is a crucial part of running a successful construction business. By creating a solid cash flow forecast, sending invoices on time, and using the right tools, you can avoid common cash flow issues. Regularly reviewing your cash flow and staying proactive can make all the difference for your construction SME.
Need advice on managing cash flow for your construction business? Get in touch with us today for tailored advice!