10 Cash Flow Pitfalls WA Construction Companies Should Avoid

It’s 2018, and the WA construction industry is facing some serious issues. The biggest one is cash flow!

Take Cooper & Oxley who went into administration after failing to settle their accounts with subcontractors.

Outraged tradies across Perth clambered over site fences to fetch their tools, left in limbo by the crisis-ridden company.

Whether these issues are due to financial mismanagement or a bad economic environment, one thing is certain: Construction companies in WA need to get on top of their finances.

Construction companies across WA are taking advantage of the millions of dollars being invested in real estate by Chinese investors.

Proper cash flow management is key to taking advantage of these financial opportunities. Many businesses fail in this regard and miss their chance. That’s why our business advisors prepared a list of 10 Cash Flow Pitfalls WA Construction Companies Should Avoid.

1. Out-of-Control Overheads

When it comes to Cash Flow, your overheads can be a real killer if they aren’t correctly assessed. The services they pay for form the foundation of your business but can also cause it to crumble. What can your business afford? And is what you’re paying for now, worth it?

It’s actually a very simple formula: collect your receivables as fast as possible and slow down your payables. Making sure not to jeopardise your relationship with your suppliers and partners. Strive to strike that balance of mutual benefit.

2. Not Investing In Your Staff

When your staff isn’t productive, your business isn’t either, which makes it hard to increase your Cash Flow. Increasing your business’s productivity has a lot to do with understanding your staff’s potential and the value they can provide.

Staff training is paramount because performance is informed by ability. Advertise for the employees you want, not the ones you need.

This may be counter-intuitive, but being more specific with your advertisement will yield a better and more specialised recruitment pool.

Check out this article for the 5 Tips to Recruit the Top Construction Workers in Perth

3. Document Mismanagement

Time is money.

In the construction industry especially, contracts, change orders, materials orders, receipts, invoices, employee paperwork, and certificates of insurance are in abundance. They all take time to process.

The solution? Go paperless. Its 2018: The technology exists. E-signatures, for instance, allow contracts and other documents to be signed on site without paper and sent back and forth between relevant parties, even overseas.

Make sure you backup your computer to a cloud service or hard drive regularly to prevent losing everything if you have computer issues.

Check out this article for the top 10 problems facing the construction industry in 2018

4. Failing to Benchmark

Benchmarking enables construction companies, regardless of industry focus, to keep pace with the rest of the industry and remain competitive as well as profitable.

In order for construction companies to remain competitive, they need to manage their margins closely, whilst keeping up to date with market changes. It’s not only about cutting costs but remaining profitable.

Effective benchmarking begins when management emulates competitors in their sector that are identified as best in class. Best in class construction companies usually:

  • Outperform their peers in a number of key metrics, such as return on assets and return on equity
  • Carry less debt
  • Show more profit per employee
  • Have a greater gross profit margin and net income before taxes

By following a few guidelines, benchmarking is made more effective:

  • Institute a formal process: This is not a “set it and forget it” strategy; management needs to make benchmarking a ritual in their business operations.
  • Choose valuable metrics to benchmark: Set up solid policy on cost structure, profits and margins that align with your business goals, region and annual revenue. Keep it simple but relevant.
  • Track the status of your benchmarking efforts: Benchmarking is an iterative process of experimentation. Test, test, test! Be constantly assessing the relevancy of strategies and metrics being used, and then adjust to market changes.

5. Doing Your Taxes Late

Late filing or payment of taxes will result in penalties and interest to accrue. This is how businesses lose thousands and destroy their Cash Flow. Tax accounting can do a lot for your business.

So, hire a tax accountant. Seriously:

  • No more missed deadlines.
  • Tax filing that is smooth and stress-free.
  • More time to focus on you and your lifestyle.

Use tax accountants familiar with your industry. They know how to get the best out of your tax return.

6. Granting Credit to Unfit Customers

Imagine if banks gave out $500,000 home loans to unemployed students with little to no possibility of paying their debts? How long do you think the bank would last without a bailout? There are some risks involved in offering credit:

  • Reduced cash flow: Waiting for late customer payments reduces your ability to purchase. Consider debtor finance to reduce this risk.
  • Reduced profit margin: Funding credit sales can make a dent in your profit margin. Usually, the cost of this only shows up in your profit and loss statement, so you need to keep this in mind when pricing your products and services.
  • Large debts: Unpaid debts pose a SERIOUS risk to your business. This is particularly true if you are exposed to large single transactions.

Similarly, granting credit to a customer unlikely to follow up on tardy payments will result in a slower and weaker Cash Flow, as well as unpaid bills. That’s why it’s important to have a solid credit policy and to follow up on late payments.

7. Not Re-Negotiating Your Long-Term Contracts

The majority of businesses use a variety of tools, services and programs to keep their businesses operating smoothly.

  • Office cleaning services
  • Retained IT specialists
  • Various insurance policies
  • Internet Service providers
  • Energy Company deals

If you know that you’re going to be keeping those companies on in the long-term, you can approach them with a more cost-efficient mutual agreement. 

8. Neglecting Your Marketing

Any improvements you can make towards getting more eyes on your business is money well spent.

Optimising your marketing spend will:

  • Free up cash to reinvest elsewhere
  • Increase your brand awareness
  • Reduces your cost-per-lead, boosting the lifetime value of your customers.
  • Allow you to get the right message to the right people at the right time for the right cost.

The ultimate goal of your marketing efforts is to grab the attention of your target market. The more specific your message is, the more powerful your message will be.

9. Not Having an Emergency Fund

Safeguarding your company’s cash is important, but hiccups in Cash Flow are inevitable.

This might not affect you as much if you have a cushion of savings. But, like most companies working with low capital, one slow sales month may spell disaster.

Have some money set aside for a rainy day or another emergency. You’ll be grateful when the lightning strikes.

Optimisation of various aspects of your business, from marketing spend, proper tax filing, and better overhead assessment can free up some money. Some of which you can to set aside for this specific purpose.

10. Not Creating a Cash Flow Forecast

Cash flow forecasting is important when planning ahead for your business. By highlighting the cycles in your business and predicting your Cash Flow on a daily, weekly and monthly basis you can see what you can spend and what areas may run into issues at a given point in time.

 

Here are the main reasons why a cash flow forecast is so important:

  • Forecasting the cash flow impact of taking on a loan to accurately model future loan repayments.
  • Allows you to automate sales tax outgoings with flexible GST profiles.
  • View a full breakdown of cash inflows and outgoings by account category, group, and line and by forecast item.

Cash Flow is a complex issue. One that many businesses fail to address effectively. At the end of the day, delegating these tasks to a qualified accounting firm will free up cash, free up time and give you back your life while helping your business to grow.

Book a Free Consultation today and see how we can help your business to develop a solid cash flow forecast.

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