Despite what you may have read, construction firms are actually taking huge strides forward when it comes to managing cashflow – and managing working capital in general.
Working capital is the amount of money tied up in the day-to-day costs of doing business. The better it is managed, the more funds a firm has available to weather any storms.
Lloyds Bank’s Working Capital Index found that construction firms have made vast improvements over the last five years to reduce the amount of money they have tied up, bucking the national trend and freeing up cash that can then be used elsewhere.
What does this mean for contractors? Well, good working capital management is a sign of financial health. Measuring the length of time cash is tied up in this way shows how efficiently firms can generate cashflow, enabling them to reinvest in their businesses.
Late payment blight
Construction firms have reduced their average net working capital days by almost four days in recent years. But the industry remains blighted by an endemic, sector-wide late payments issue which can have a huge impact on working capital and, by extension, cashflow.
Lloyds’ report found that construction companies wait an average of 61 days to get paid, compared with 48.9 in other sectors. It also highlighted that the largest firms are bearing the brunt of this, waiting an average of 65.9 days to be paid, compared with 63.2 for smaller businesses.
What can be done?
Effective working capital management can only be achieved when it is understood by everyone in the business, with all employees working together to improve payment processes, stock control and other related processes. While difficult, there are some steps companies can take.
Speaking to customers and agreeing payment processes ahead of signing new contracts – to iron out exactly what information that customer needs to process invoices, for example – can prevent or significantly reduce delays.
“It is vital to remember that making sure that your company follows the best processes to manage its finances can shape its success”
Producing cashflow forecasts ahead of any new project allows you to lay out when you expect to be paid and how long you are prepared to wait before receiving cash. As projects can often evolve, keeping this up to date can help assess the impact of any changes in scope.
Large firms are now also duty-bound to report their payment terms and performance. Businesses should therefore be taking these into consideration when negotiating with new clients.
It is vital to remember that cash is king for any business, and making sure that your company follows the best processes to manage its finances can shape its success.
Taking the right steps to manage working capital while improving payment practices can make sure that our construction industry continues to prosper.
Llewelyn Mullooly is director of working capital at Lloyds Bank