How construction businesses can conserve cash

https://www.constructionenquirer.com/2020/06/08/over-a-third-of-firms-down-to-less-than-3-months-cash/

A study by the ONS has revealed that around 35% of construction firms are down to under 3 month’s cash reserves, of which 5.2% are down to under 1 month, following the pandemic lockdown. 

Why does this happen? 

Well, the lockdown for one. Many sites will have been unable to continue through the strict lockdown and many others will have likely had jobs pulled throughout the entire process. Even after the lockdown has been eased we’re seeing clients have jobs pulled due to a lack of funds from the client. 

However, this also happens due to a lack of planning and cash saving in normal environments. Some of our wonderful clients have managed to build up a war chest of over a year’s survival cash, ‘just in case’, and thank bloody goodness they did! 

How to ease the situation now: 

1. Financials

First and foremost, you NEED to get to grips with the financials in your business, everything hinges on this. That means getting an accurate and up to date set of Management Accounts (Profit and Loss (how much profit (or loss) you’ve made), Balance Sheet (the overall health of the business), List of people you owe money to and vice versa etc). Then you need to understand what they’re telling you. Scrutinise these documents – it’s all in the detail!

2. Cash

Pull together a proper cashflow forecast. Put simply, you put in your expected income over a period of (atleast!!) 3 months, and then you put in your expected outgoings (direct debits, subcontractor payments, staff payments, insurance, rent, petrol, EVERYTHING, no matter how small!). We can provide you with an Excel spreadsheet, or you can use an app such as Fluidly if you’re on Xero. 

3. Pipeline

Look at your work pipeline. If you have apps like Workflow Max or Servicem8, you can do this in those systems. Then take an objective view on all of these projects. Are they likely to be cancelled or postponed? List each one and put a probability of it actually being started (or finished) within the timeframe. This exercise gives you further clarity on cash. 

4. Systems and processes

Look at your current systems and processes. Are you using a proper accounts system with the correct staff running it (if you couldn’t get the information in point 1 easily, then chances are you’re not.)? Are you using an effective job management and scheduling system? Are you collecting money from customers quickly? Are you having to fund large amounts of cash before you get any money in from clients? If you get a £750k job tomorrow, would you be able to service it or would you have to outlay a lot of cash upfront for subbies and materials before you get anything in? Have you got credit accounts with suppliers (Travis Perkins, Wickes, Trade UK, Benchmarx etc all do decent terms with discounts – if you’re doing a lot of transactions for materials etc in cash, chances are your buying process is either off or you’re missing out on credit terms (or both!) – ask all of your suppliers!)?

5. Plan

Once you’ve got this information, start to work backwards. Take an objective (and idealistic) view on what you could do to get yourself to a point of further comfort. 

Can you strip out any costs? Can you change your payment terms? Can you get better systems in place to save time and / or money? Can you pull any projects forward to get them invoiced quicker? Have you got anyone who owes you money that could do with a little nudge? Can you sell any unused assets (vans, trailers etc)? Will any of your suppliers who are able to help you out by offering longer payment terms or discounts? Could you offer an employee overtime rather than getting another member of staff or subbie on board? 

Write everything you COULD do down, whether you think it’s worth doing or even possible or not (more is possible than you think – I know this from experience!). 

6. Action

To quote Thomas Boone Pickens, “A plan without action is not a plan. It’s a speech”. 

All the above is pointless if you don’t do something with it. You can spend hours, days and even weeks analysing and planning everything, but if it just stays as a list on your desk then what is the point? To quote a client of mine “you’re just analysing for analysing’s sake”. 

Take the list you created in point 5 and work down it. If you think one of the points is silly or won’t happen, try it anyway because you really never know. That unreasonable supplier you think will never help you out might just surprise you. That employee that you think will definitely not take a temporary pay cut might just surprise you. That client who owes you a load of money and has been a bit of a pain might just surprise you!

I’ll say it again, try everything, no matter how small you think it might be. A lot of smalls can add up to a big. 

And just in case you still think it won’t work, this is some of the process we go through with our clients. It’s also the process I went through back in March that enabled us to cut the overheads of one of our clients by 77% within a week, giving them about 2 years’ survival on no income. 

Good luck - go forth and prosper!

A

www.facepalmfd.co.uk

Your Strategic Financial Partner