Give Yourself the Gift of Good Cashflow
The new year is usually welcomed in with a couple of quieter months particularly in earthmoving & construction. Naturally, though, tools down can mean a downturn in cashflow 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.
If we look back quickly, 2018 was quite a ride. We witnessed harsh weather conditions, one of the worst droughts we have ever seen, and yet another leadership spill (6 PM’s in 10 years). It was also 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 via major infrastructure projects and housing development.
Let’s look at what can you do to soften the blow when the incoming cash tap gets turned off over the break. Managing cashflow becomes essential to avoid stress and heartache later.
Understand Your Cashflow
The old Scouts Honour motto holds true here. Be Prepared! If you are aware that you have a quiet period coming up, prepare for it and put measures in place that will assist your cashflow. Put simply, you need to budget for the quieter months by understanding your cash movements throughout the year. Some bills, like finance payments, rent, and tax, will always need to be paid regardless of money not flowing in. 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. 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.
Only purchasing necessary items and minimising unnecessary spending will lessen your outgoings. 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 are 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.
Know Your Customers
Understanding who you are working with is good practice. 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 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 whether the business is reputable. Have they dealt with them before? Did 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 does not 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
Be strong and firm when negotiating contracts and payment terms. 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 allows you to receive progress payments on contracts providing you with further assistance.
Finance repayments are one of the largest expenses that earthmoving businesses have. Making these payments on time ensures you do not 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. Your broker or bank can organise this at the time of setting up your loan.
At Magnolia Lane, we tailor finance solutions specific to your unique business needs. It is our role as your equipment finance broker to source the best possible rate for you. Through our accreditation with a suite of lenders, there really is no limit to what we can assist with. Contact us or get a free quote today and let’s grow together.