Accountants and business coaches talk a lot about cashflow forecasting but why should you do it? Is it necessary and what are the benefits?
Let us take you through some of the main benefits of adopting a cashflow forecasting habit in your construction business.
It can help you to grow your business safely
Going on the journey from a 6 figure to a 7 figure and beyond construction business can be exciting but also carries risk.
Many profitable construction companies go bust due to running out of cash.
Forecasting scenarios allows you to see what happens to your cash under different circumstances and allows you to plan what you should do to get the best results.
Understand what is coming down the road
If you were driving your car down the motorway and you saw a tree in the road you would swerve to miss it, right?
Without cashflow forecasting you could be driving down the road with a blindfold on and you may not see the ‘tree’ until it is too late and you have hit it.
Cashflow forecasting helps you to see what’s coming and change direction if necessary.
Identify funding requirements
Winning a big project can be exciting but how will you fund it?
If you pay for material, wages and subcontractors before you are paid by a customer, how will you fund
Do you need to consider invoice financing, an overdraft, asset finance or a loan?
Without forecasting the cash you need, you could apply for too much or not enough.
Or you might not have the insight available to know you need to go for funding in the first place.
If a funding need is identified, we can introduce you to brokers who may be able to get funding in place.
Project based businesses have less trends than some businesses however trends still exist. It might be that you have less work in December than other months and you close down over Christmas and New Year.
If you know that every December you have a low cash balance, you may choose to hold off on capital expenditure until January but if you don’t spot the trend and spend cash at the start of December then you could be causing yourself unnecessary headaches. Timing is really important.
Help you to sleep at night
Business owners often talk about lying awake at night thinking about cash or waking up in the middle of night worrying about cash.
Will they be able to pay the wages at the end of the month, will the invoice due get paid on time, will they be able to pay suppliers on time? The list goes on and causes a lot of stress.
Fear of running out of cash can result in mental health challenges but having the insight to know what’s coming (even if it’s not good news), can help to give clarity of thought.
Give you time to take action
If you are going to run out of cash in 6 months it makes sense to know that’s coming.
6 months can be enough time to win more work, cut costs in a controlled manner, negotiate with suppliers and HMRC, apply for funding or restructure.
If you find out that you are going to run out of cash next week then your options may be limited.
Having the insight to see what is coming allows you the headroom to take action.
Need help with cashflow forecasting?
The team at Empowered by Cloud have many years’ experience in helping construction businesses manage their cashflow.
With the help of Float Cashflow Forecasting, we can automate some of the process and work with you on cash management strategy.
See below how we have helped one of our clients STONE Contracts to manage their cashflow.