Simon Shaw, Head of Property and Construction, Duncan & Toplis

Cash flow issues can present themselves in any industry, but few are as exposed as the construction sector with every project juggling multiple costs. Here, tight deadlines, long supply chains and vast project timelines can cause stumbling blocks for businesses and developers.

For example, delays in receiving payments from clients can lead to reduced reserves, which in turn can lead to a lack of funds to buy materials, pay employees and cope with unexpected issues like soil problems or hidden utilities. And the chances of this having a knock on effect on the overall delivery of the project are high.

Construction businesses are frequently tasked with fronting a lot of the project cost before an invoice has even been sent to the customer. As a result, effective cash flow management is a critical element of running a successful project in the sector. Failure to do your due diligence when it comes to cash flow can be catastrophic – not just for the project you are working on, but for your business future as a whole.

Late payments can reduce the opportunity to secure future contracts, and it also threatens project completion. Ensuring that all relevant parties are paid on time should be an absolute priority for construction businesses – but it is important to understand why.

Why is cash flow important in construction?

In construction, cash flow takes on a particular importance, with multiple areas of funding required to balance a project smoothly. These costs include paying for labour, subcontractors, material deliveries and permits, and all of these overheads can be due at different stages of the development process, so need to be allocated and managed as part of the project plan early on.

Most construction projects rely on finances from external sources such as lenders or investors, and over the last few years there have been consistent concerns around inflation spikes that drive the price of projects up. This makes costing a

development even more difficult, and can result in problems if late payments are made to disrupt your cash flow. Lenders can impose penalties if they don’t see returns on their investment in suitable time, and interest costs can soon see your final bill skyrocket beyond initial expectations, putting the overall project in jeopardy.

Monitoring cash flow also enables you to flag any potential risks that could arise in upcoming projects, prepare for smoother outcomes in the future and ultimately grow your business.

Common cash flow issues in construction

Problems around cash flow can be rife in construction if you are not savvy early on, and they can take on many different forms. High upfront costs is an early hurdle to overcome when mapping out a construction project, as contractors and developers are often asked to provide significant payments towards labour and equipment before a spade has even entered the ground. This can set you on the wrong foot immediately if not handled correctly and promptly, and create further issues down the road.

Some of these issues can be out of your control, such as delayed payments from clients. This is why it is important to ensure your cash flow management includes reserves to anticipate and prepare for delayed income. Late payments can affect project timelines, but can also affect the funding of your project on a day-to-day basis, with subcontractors to pay, equipment to buy and hire, and deliveries to order.

How you can improve cash flow

For every obstacle to overcome with cash flow, there are solutions you can adopt to mitigate and minimise the risk. It is important that all parties to the contract understand and acknowledge the agreed payment terms, as well as details around approval and appeals processes, and terms outlining when final payment will be made.

Another administrative change that proves effective is setting up a clear schedule for invoicing, so paperwork does not delay your positive cash flow. Don’t be afraid to charge for late payments; as this can easily derail your project.

Effective cash flow management is the cornerstone of any successful business regardless of industry. While the construction of a building is your responsibility in this industry, it cannot be achieved without strategic planning around cash flow and the management of funds coming in and out of the business’ pot.

Put simply, if there are cash flow problems within your construction business, it will inevitably impact your ability to complete the project, pay your employees and operate as a successful, profitable company in the sector.

Duncan & Toplis provides accounting and business services to property and construction companies across the UK. To learn more about how we can help with cash flow management, and many other business challenges, visit www.duncantoplis.co.uk.

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