If we look back quickly, 2018 was quite a ride. We witnessed harsh weather conditions with a fair share of Australians doing it tough and battling one of the worst droughts we have ever seen. It was a year that saw yet another liberal party coup and leadership spill (6 PM’s in 10 years!) and a year that saw growing uncertainty in lending policies due to the Banking Royal Commission. With the turmoil that was however, at least we saw strong performance in the earthmoving industry across several states via major infrastructure projects and housing development.
Looking ahead, the new year is usually welcomed in with a couple of quieter months particularly in earthmoving & construction. The holiday period allows us all to enjoy some much-deserved time off and refresh with family and friends. Naturally, tools down can mean a downturn in cash through the door and even though the income stops flowing the bills still need to be paid. This can cause financial stress for you and your business if you are caught off guard.
So, what can you do to soften the blow when the incoming cash tap gets turned off? Managing cashflow becomes essential and these are some strategies that you can put in place now to avoid heartache later.
Avoid the Christmas hangover by understanding your cashflow
The old Scouts Honour motto: Be Prepared! holds true here. If you are aware that you have a quiet period coming up, then you can prepare for it and put measures in place that will assist your cashflow. Put plain and simply you need to budget for the quieter months by understanding your cash movements throughout the year. Some bills will always need to be paid regardless of money not flowing in – finance payments, rent, taxes, to name a few – make sure you have enough set aside in advance to make your upcoming statutory payments.
By understanding and preparing for this period, cashflow facilities can be put in place for you to utilise and these are arranged for you by your bank or broker. Overdrafts and debtor finance arrangements can give you much needed relief during the cash poor months. Additionally, ensure you have a separate bank account set up to help manage your tax affairs.
Try to minimise your outgoings by only purchasing necessary items and minimise unnecessary spending. Try not to overspend on any materials that are just going to be sitting around gathering dust in the quieter months.
Take into consideration any irregular expenses that may occur over the Christmas period, for example, do you need to account for any transportation costs to get your machinery back to your yard while you’re not working for the extended period?
Another thing to note is that the early bird often gets the worm so invoice your work as soon as you are able rather than at the end of the month, delaying invoicing to the end of the month is only delaying money you are owed.
Choose your customers wisely
It is good practice to really understand exactly who you are working for. Straight up, some people are just bad payers. To minimise the risk and ultimately the stress of working with bad debtors, there are systems such as CreditorWatch (www.creditorwatch.com.au) which allow you to gain an understanding of customer’s paying habits by doing a lot of the due diligence for you. Often it is just as effective to ask your other contacts in the game – Is the business reputable? Have they dealt with them before? Do they pay their bills??
A good debtor collection process is key. If someone misses a payment then get on the front foot straight away and follow them up, preferably with a phone call. It doesn’t pay to be Mr. Nice Guy and hope that they will pay you, they are already late. It is often true that the squeaky wheel gets the grease – people are more likely to pay the person that is hounding them than the one they don’t hear from.
Negotiate your payment terms upfront
When negotiating contracts be strong & firm in respect of the payment terms you both agree on. Although this can be challenging at times, particularly when dealing with the larger contractors in the industry, this strategy will pay dividends in the long term.
An upfront payment on the contract can be a welcome incentive. A mobilisation payment to the value of 10% of the contract can be requested to avoid getting into a cashflow hole. The Security of Payments Act protect your rights and allow you to receive progress payments on contracts providing you with further assistance.
One of the largest expenses that earthmoving businesses can have is finance repayments on machinery. It is important that these payments are made on time so that you don’t adversely affect your credit score or future lending capability. A smart strategy in respect of finance arrangements is to structure repayment plans that work best for your business. An example of this is giving yourself a repayment break in January, it will result in marginally higher repayments across the other 11 months of the year but will give you cashflow relief when you need it most. This kind of strategy can be organised by your broker or bank at the time of setting up your loan.
As part of our role as a finance partner, we would love to chat with you if you need any assistance with your finance arrangements or if you just are looking for someone to speak to about your business in general. At Magnolia Lane we pride ourselves on helping our clients grow and succeed. Please don’t hesitate to contact us on (02) 8287 3000 or email email@example.com.