Your browser is no longer supported

For the best possible experience using our website we recommend you upgrade to the newest version of your browser.

Your browser appears to have cookies disabled. For the best experience of Construction News, please enable cookies in your browser.

Welcome to the Construction News site. As we have relaunched, you will have to sign in once now and agree for us to use cookies, so you won't need to log in each time you visit our site.
Learn more

Identify cash flow risk before it’s too late

Becoming more forward thinking about payment can help avoid costly mistakes

Cash flow management can be the biggest headache a small company boss faces, especially with payment dates of 60 days or longer.

Now that large clients prefer to bundle up work and award it to main contractors rather than deal directly with local firms, the headache can become a migraine.

“We are now being forced into working as a subcontractor,” says one boss who asks not to be named.

“And many of the larger contractors make their money by holding on to subbies’ money as long as possible.”

Julia Evans, chief executive of the National Federation of Builders, advises small contractors to minimise exposure to risk. “Companies need to be monitoring cash flow position and implementing -processes that quickly identify risk among their customers, -taking prompt action where necessary,” she says.

Cash should be thought about from the outset, rather than when problems occur. When tendering for a job, consider not just how much it is worth but how it will be funded.

“Make sure the client has the finance they say they have and that they set it aside to pay you. If possible, build up an independent direct relationship with the client’s funding bank and get a letter of guarantee that the money is available,” says Bill Rabbetts, chairman of Hampshire-based Drew Construction.

Know your client

SME contractors should not be afraid to ask for funding information from their potential customers, whether they are clients or main contractors.

“You can insist that you see the contract between the client and their funder. It’s not a legal requirement but you can be firm with them,” Mr Rabbetts suggests.

Even if you can’t get access to a client’s or main contractor’s funding bank you can do a credit check on them and continue to monitor their business, noting project wins and growth.

The NFB advises contractors to try to choose their clients carefully.

“Some SMEs are working more and more for the private sector but the public sector is better at paying. They would be well advised not to put all their eggs in one basket,” Ms Evans says.

Jon Tolputt, managing director of 15-year-old CT Construction, says he has kept his business going by working directly for private clients. “You have to take what work there is. Once you get better you can draw a line under some contractors,” he says.

Even if a contractor does not have a finance department, the books should still be overseen and any late payments noted. “Someone should take responsibility for monitoring debtors’ books and should take immediate action if necessary,” Ms Evans says.

Bobbie Scragg, business adviser at Business Link, says: “Have a spreadsheet and make sure you update it regularly so that you know what is going out month by month.” She adds: “Always remember you have to pay VAT and tax and don’t use this up in the business before you have paid it.”
There is also a range of products available. Some providers will give an advance on invoices to help cash flow, a practice known as factoring.

“We offer a pre-payment advance on invoices or on the -application for payment so a company does not have to wait 60 days. We will pay 30 per cent to 75 per cent of the invoice depending on the needs of the business,” says Jason Heath, product manager at Bibby Financial Services.

Do consider factoring carefully, says Ms Scragg. “It’s very hard to get out of it because it does cost money to do it,” she says.

Tender finance
Contractors may consider other parts of a tender such as its worth, materials and their own suppliers but not about funding the contract until it is won. “They need to understand the payment terms.

Always ensure you know what you need to do to get paid,” Mr Heath advises.

Alternatively, credit insurance will pay out when a customer goes bust or is unable to pay for work. While it doesn’t manage cash flow directly, it can give a company security and more bargaining power.
“The main contractor cannot afford to finish the job but the client will not pay until it is finished,” says Tom Rolfe, director of LDPA Credit Insurance. “The main contractor already owes you £50,000 but wants you to do another £20k to finish the job.

“Frequently companies that are uninsured think they’ve got to do that work. But if you had credit insurance you might not have to do it.”

And you may not need a c-redit insurer. “Working out a credit limit can be done in-house. Look at their filed accounts, contract wins and jobs going. You can do it yourself,” he says.

If things come to the crunch, you can stop work, says Mr Rolfe. “If a company is seriously overdue in payment then the SME should have some systems and procedures in place which might culminate in taking the guys offsite and doing no more work.”

Do not be swayed by a big money job. “It’s better not to do a job than to do it and not get paid properly,” says Mr Rabbetts.

Mr Tolputt agrees. “Just remember, small companies can only run out of money once.”

Keeping the cash flowing

  1. Keep your balance sheets and business forecasts up to date.

  2. Investigate reasons for variances in forecasts.

  3. Watch out for interest rate changes.

  4. Keep an eye out for newcomers to the market and how they might affect business.

  5. Carefully consider taking out a loan or other form of finance and try to build a relationship with the person managing your account.

  6. Keep your lender informed with good and bad news.

  7. Check your customers’ credit by asking for bank references, their payment record with other suppliers and their accounts (available at Companies House).

  8. If you think a customer is a risk, it might be possible to get full or part payment before doing the job.

For more information and advice see