Maintaining a healthy cash flow is crucial for the success and sustainability of any business, particularly in the construction and manufacturing industries. These sectors often face unique challenges that can impact cash flow, such as project-based billing, inventory management, and supplier payment terms.
If you operate in the construction or manufacturing space and are looking for strategies to improve your cash flow and keep you thriving even when times get tough, here are eight practical things you can do!
1. Accurate Financial Forecasting
One of the fundamental steps to improving cash flow is accurate financial forecasting — what do your projected numbers look like for one month, six months or 12 months from now? Developing detailed budgets and projections that take into account revenue and expenses on a monthly basis means you can anticipate cash flow gaps and surpluses, and make proactive decisions to address them now.
2. Streamline Accounts Receivable Processes
In construction and manufacturing, where projects can have extended timelines, timely payments from customers are vital. To help stay on top of these payments, having an efficient accounts receivable process is a must. This will help to ensure terms of trade are up-to-date and binding, and include clear payment terms, frequent invoicing, and reminders for overdue payments. Offering incentives for early payments and penalties for late payments can also motivate clients to settle their dues sooner rather than later. To protect yourself against bad debt risk, it’s also a good idea to consider trade credit insurance.
3. Negotiate Favourable Supplier Payment Terms
When it comes to dealing with suppliers, friendly negotiations are the way to go! For some businesses, building positive relationships with suppliers can result in huge benefits, such as arranging extended payment terms without incurring penalties. This can provide you with the necessary breathing room to manage your cash flow better, especially if cash flow positions are lean.
4. Optimise Inventory Management
For manufacturing businesses, inventory management plays a critical role in cash flow management. Striking the right balance between having enough stock and not overdoing it is crucial for cash flow — this will help you to avoid any excess inventory that ties up valuable working capital. A great idea here is to implement just-in-time inventory practices and inventory management software to streamline the process and reduce carrying costs.
5. Monitor and Reduce Overhead Expenses
A great habit to get into as a business owner is periodically reviewing your operating expenses to identify areas where costs can be reduced. Energy-efficient practices, renegotiating contracts with service providers, and investing in technology to automate tasks and minimise labour costs are all areas where you can identify quick wins. Every dollar saved contributes directly to the bottom line and improvement of cash flow.
6. Consider Partial Payments and Progressive Billing
For construction projects, you can consider structuring contracts to include partial payments or progressive billing. Receiving payments in stages as milestones are achieved can help maintain a steady cash flow throughout the project’s duration. While this solution may not necessarily work for everyone or every type of work, it’s worth considering this for long-term contracts as a means of improving your cash flow position.
7. Diversify Revenue Streams
In addition to core services or products, you should explore complementary offerings or vertical integrations to diversify your revenue stream. These may be services or products that appeal to existing customer bases, or may enable you to break into new markets. Diversification can create additional income sources and open doorways to future growth, as well as reduce the risk of relying on a single revenue stream.
8. Consider Equipment Financing
For manufacturing and construction businesses, purchasing new equipment can be a significant expense. Rather than outright buying new equipment, you could consider equipment financing, which will allow you to conserve cash and allocate resources more efficiently.
We’re Here to Help!
Improving your cash flow is a continuous journey, and takes a combination of strategic planning, efficient operations, and diligent financial management. This is where we can help!
As a business advisory firm, we specialise in helping construction and manufacturing businesses to navigate cash flow challenges successfully. By working together to assess and implement suitable measures, you can enhance your financial stability, seize growth opportunities, and build a strong foundation for long-term success.
Find out more about our Business Advisory services today!