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June 2014

Keep your cash flowing

05 Jun 2014, Business Tips, Prove Your Know How

Don’t get stuck in a situation where you haven’t been paid for months but you can’t afford to stop working – use the tips below to ensure you have sufficient cash flow.

You’ve heard the story: what started as a dream job – large, challenging and profitable – has now become unbearable; your client has stopped paying bills on time, questions each and every line item and quibbles over your meagre margins; and, all the while, your overdraft is growing.

Clients like this can make the life of a small builder exasperating in any environment. In fact, it seems that every builder I’ve met has at least one such story to tell. But it doesn’t need to get to this point; it’s possible to organise your business so you’re paid on time, every time. Here are five financial disciplines that, when adopted properly, can help make non-paying clients a thing of the past.

1. Ensure your building contracts include your financial terms and conditions

Check over your agreements to ensure that your terms and conditions set out your invoicing and payment expectations, such as progress payments. Make sure that you have the right to stop work (and remove materials) if a progress payment is not made on time.

For example, if your normal process is weekly invoicing for payment of all costs incurred in the preceding week (labour, materials and subcontractors), make sure your agreements specify this process and stipulate when the payment is due. Also check that your terms and conditions state that “should payment be delayed, the costs of debt recovery will be added to any outstanding payments”.

While most building association agreements are excellent, they may need to be adjusted to suit your particular situation. Having your lawyer check over these is a worthwhile investment, as it’s better to pay them a small fee than incur substantial losses down the track.

2. Discuss your client’s financial position before incurring costs

Most people know how much a replacement tyre is likely to cost, so they’re not alarmed when the bill is presented. But most homeowners have no idea how much a renovation can amount to, particularly if there are hidden problems to fix.

To avoid causing your customers surprise and angst, check that a proposed job fits within their budget before incurring any cost in designing or pricing. You may not be able to give a fixed price, but in most situations you can use your best judgement and give a ball park figure (it helps to include a best and worst scenario). Listening carefully to their response can save you both time and money.

Furthermore, it’s worth enquiring whether or not a lender is involved, since this is likely to affect how and when you might be paid. Simply ask if there are any other parties involved financially. It pays to be sure about this because there is nothing worse than starting a job and not being paid the final amount because your client runs out of money, or a bank holds up payment.

3. Take a decent deposit

It costs money to prepare free estimates and quotes and while these costs may be paid for by the profits from your jobs, this profit is not usually realised until after the client has made their final payment. Also, once an agreement is signed, it takes time and money to gear up a job – you may have to spend money recruiting new staff or purchasing new equipment.

Carrying these early costs for the duration of the whole job can affect cash flow and limit your purchasing power, so request a decent deposit.

To determine a fair deposit fee, make a rough calculation of the costs of project estimation and preparation, in addition to a fair proportion of the building and labour costs that will be incurred before the first payment is received. Try not to be your client’s bank.

4. Keep short accounts

It’s not unreasonable to expect payment on a weekly (or fortnightly) basis. Your client may believe that, because you have monthly terms with your suppliers, he/she should have the same arrangement with you. However, there is no requirement for you to do so.

Your arrangement with your supplier is a business-to-business relationship, built on your reputation and your credit history. You cannot afford not to pay your suppliers on time, as failure to do so will affect your ability to make future purchases. It may even close you down.

Your client’s arrangement with you is different. For them, it’s a ‘one off’ purchase and, if they don’t pay on time, it doesn’t threaten their income one bit – but it does threaten yours.

It’s completely acceptable – and should be expected – that your client pays you in a timely manner, so you can pay your team, suppliers and subcontractors in a timely manner as well. This should ensure the smooth financial operation of your business.

5. Variations – describe them in detail and gain a signature for each one before beginning

In my experience, unpaid variations are the single biggest reason for owner-builder disputes and builders losing money. Again and again, I come across builders who start on variations without getting their client’s authorisation “because it needs to be done”. While they’re allowed to carry out variations that need to be done, clients are allowed to refuse to pay for work they did not authorise.

While it might seem cumbersome, it is cheaper to take the time and effort to communicate with your client and get them on board (in writing!) before starting any variation.

Maximise the good times

While it might be possible to survive a bad paying client in good times, an astute builder makes use of the opportunity good times brings to
review, strengthen and update client payment systems. It’s the disciplines adhered to in good times that enable a business to make the most of growth and survive tough times.

About The Successful Builder

Graeme Owen, based in Auckland, is a builders’ business coach. Since 2006, he has helped builders get off the tools, make decent money, and free up time for family, fishing, and enjoying sports. Get his free ebook: 3 Reasons Builders Lose Money and How to Fix Them for High Profits at http://TheSuccessfulBuilder.com


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