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The property market is booming, and both the property and construction sectors have had a terrific run over the past several decades. Many builders and property aficionados seeking to capitalise on the demand for new developments have done very well for themselves and played a key role in delivering housing and amenities for a growing population.
But the sector is not without its challenges. In fact, property and construction are often considered high risk due to the level of competition and the nature of the work. The businesses that thrive are generally those where leaders have implemented sound financial practices to support the biggest challenge of all: managing cashflow.
Cashflow is king in every business, but it can be particularly difficult when you’re dealing with large, staggered payments and an array of stakeholders including insurance providers, tradespeople, financiers, and product suppliers.
Unfortunately, hearing that a construction or property company has gone into liquidation is not uncommon – be it a small operation or a large incumbent.
Whether you’re a builder who went out on your own or a developer who loves the thrill of delivering a new project, here are 5 tips to help you manage your cashflow for success.
1. Get your contracts right
While it's typical for smaller building companies to use a standard building contract (such as those provided by the Housing Industry Association), it’s extremely important to consider each individual project and how your building contract protects you and your client.
The contract is your roadmap and essentially “lays the law” for all aspects of a project – from how you manage contingencies, to when payments are due, and what happens if something goes wrong.
In terms of cashflow, the way your contract is structured around payments can have a huge impact on your planning and budgeting.
Action: step: Partner with a lawyer you trust and make sure you understand every aspect of each contract before you sign.
2. Plan ahead
You need significant working capital to pull off any property and construction project, and planning ahead to manage staged payments can be tricky when you’re extremely busy – or don’t have effective systems in place to provide your financial team with full oversight of incomings and outgoings.
Typically, construction projects require large up-front costs yet they only generate revenue when stage payments are made. Negotiating a larger up-front payment for any project can make your cashflow easier to manage. It’s also important to understand that there will likely be a mismatch between revenue and cashflow throughout the project’s lifecycle and to look for where this is occurring.
Another key aspect of planning ahead is leveraging all available tax incentives which provide opportunities to save money or defer tax to keep more funds in your account.
Action step: Make time to plan your project in advance, including how you will use tax and other incentives. Schedule time to check in and evaluate how cashflow is tracking across the project lifecycle.
3. Pay invoices on time to retain quality trades
With all the recent developments, there is a severe shortage of quality trades in almost every state and territory in the country. If you develop a reputation for being inefficient with payments, you may find that you can’t secure the resources you need to complete existing or future projects.
Action step: Keep a budget and know in advance who you will need to pay and when. Consider your tradespeople a vital element to business continuity, and set aside funds to pay them on time.
4. Don’t underestimate variables and contingencies
When variations go wrong in property and construction, they can go horribly wrong.
For example, a company that mismanages a job and is found to be at fault could lose millions of dollars. And while a large company may survive, a small operator could face liquidation and potentially risk their personal assets as well.
Companies also encounter difficulty when they don’t have an effective process to negotiate and approve variation orders, leading to potentially lengthy and costly disputes.
Action step: Put aside a portion of every invoice payment for a “rainy day”. Or, mark up services by a small percentage and put this aside. If it doesn’t get used, it becomes profit.
5. Partner with a financial expert who understands your industry
Finances are not everybody’s “piece of cake” and if you are struggling to find time to keep on top of cashflow, or you don’t have effective systems in place, it’s imperative to find a financial expert you can trust.
Ideally, you want to engage a team that understands your industry and can benchmark your processes against your competitors to help you drive improvements and uncover risks before they have an impact.
At RSM, we have a dedicated team that works closely with enterprises in the property and construction space. Our knowledge spans accounting and tax, audit and assurance, business advisory, restructuring and recovery, and more.
One valuable way that we support property and construction businesses is with financial audits at certain stages of a construction project. The audit produces a “cost to complete” figure which can be checked and balanced against estimations to achieve peace of mind that everything is on track (or take corrective action if it’s not).
We can also:
- evaluate your financial systems and processes against best practice
- provide much needed advice around cashflow practices
- help you structure your business in a way that encourages investment and protects your assets
Action step: To save time, stress, and gain assurance over cashflow in your property and construction business, contact your local RSM office.
For more information about property and construction business advice, click here.