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How Construction Businesses Can Build Strong Foundations With Cash Flow Forecasting

Recently, we were delighted to be joined by accountant Laura Taylor from Empowered by Cloud and her client Richard Stone of Stone Contracts for our webinar on How To Prepare Your Trade Or Construction Firm For The Coming Months.

Laura and Richard were incredibly insightful and generous in sharing their collective wisdom on how construction and trade companies are dealing with the impact of the coronavirus pandemic. They also offered some expert advice on how such businesses should move ahead and build resilience over the next few months.

Read on for some of their best advice on getting your construction firm in good shape for whatever the future may hold.

How has the construction and trade industry been affected by the pandemic?

“One by one, we saw a domino rally of projects getting cancelled over the course of four and a half days. The whole of our sales pipeline got wiped out. It was challenging… I think there’s very few people that have escaped without having projects paused or ultimately cancelled completely. I would guess that there is no construction business that has not suffered significant impact.” Richard Stone

richard stone

It’s clear that construction and trade businesses have been hit by a number of issues as a result of the coronavirus pandemic.

As Richard pointed out during our webinar, many construction businesses already have huge overhead costs based on sales from 12 months of trading, and now their income has taken a significant hit. Add to this the complexities of furloughing staff or making redundancies, and construction business owners have a lot to juggle right now.

In the UK Government’s Monthly Statistics of Building Materials and Components report for August 2020, 2.4% of construction firms said they had temporarily closed or paused trading during the pandemic (compared to a UK average across all industries of 4.2%). Turnover for firms still trading has also been significantly impacted – 7.7% of construction firms said their turnover had decreased by more than 50%, and a further 17.0% said turnover had decreased by between 20% and 50%.

There was also the emotional impact on staff to consider too, as Richard pointed out and shared how he has been supporting his employees.

“The challenge was keeping in touch with people, keeping them motivated, making sure that you know where they’re at with their mental health – how were they feeling about stuff? There’s two parts to that. There was the part about actually doing the right thing as a humane employer, and that really revolved around checking in with them and how they work.

“The one thing that we found really beneficial was keeping them abreast of what was going on within the business. What we were doing as business owners to try and mitigate the risks around coronavirus. What we’re doing with potential new orders coming in, how are we looking financially, commercially and operationally from a risk management point of view, so that they could see we did have plans in place and that things were going to be okay,” said Richard.

What support is available to construction businesses?

There has been a range of support available to help construction companies get through the complexities of the coronavirus pandemic.

“HMRC are being very understanding because they know that this has hit right across the board. If you’ve got a problem with regards to paying your VAT or PAYE or any other taxes, it’s an option to speak to HMRC yourself via the Time To Pay helpline.” Laura Taylor

For example, there were a number of UK government schemes which were set up to help businesses, including the Bounce Back Loan, CBILS and grants such as the technology and professional advice grant available through Local Hubs or the Construction Industry Training Board (CITB) grants scheme which was created to help construction businesses increase their competitiveness in the sector. When taking out a business loan or grant it’s important to consider the long term impact on your cash flow, a topic which we’ll come to later.

Laura Taylor accountant

The UK government’s Monthly Statistics of Building Materials & Components Report also stated that 48.4% of construction businesses have applied to defer VAT payments, and in the webinar Laura warns that business owners should be thinking ahead and preparing well in advance for when the VAT deferral payments kick in from March 2021. She recommends speaking to HMRC to set up a ‘time to pay’ arrangement and see if you can spread repayments over 12 months to make it easier on your cash flow.

86.6% of construction firms said they had applied for the UK Coronavirus Job Retention Scheme and with the furlough scheme now winding down, businesses are going to have to make some tough decisions around making redundancies.

Why is cash flow forecasting and scenario planning important in construction?

“Cash flow forecasting is really important, especially when you’re looking at a construction business, because you can’t look at the past and use that to predict the future. You need to be very in tune with what’s happening. So we’re always looking at project cash flow forecasting, rather than cash flow forecasting for the business as a whole.” Richard Stone

With every project you take on you should be asking – do I have cash to fund this project all the way through? And the best way to answer that question is to have a solid cash flow forecast available at the click of a button.

“We use Float for all of our clients and when we build a forecast, we build it from a project perspective. So if we know there’s a certain project that’s due to kick off, we know the valuation dates, we know the payment terms, what material is going to be used and what payment terms we have from the suppliers – we can then model those through. Having that information is so much more valid,” Laura added.

Richard believes in making cash flow forecasting into your business processes. He recommends construction firms have a basic programme of how they’re going to deliver the work, then build a cash flow forecast on top of this. This will give your accountant the opportunity to map out cash based on what’s in the programme.

Richard tweaks his cash flow every week with his accountant Laura, because things can change at the drop of a hat – new opportunities come in, or the weather changes and projects are altered. A programme can be as simple as a six line chart done in Excel with three or four key activities, looking at the relationships between those tasks. Equally it could have 2,000 lines. It depends on the complexity of information you’re dealing with. It’s a communication tool and helps you articulate what you’re doing and when to your customers. Richard suggests that even if you can share the site diary of a particular project with whoever is doing your forecasting, they’ll be much better informed. The forecast will be better, more accurate and more useful.

Richard adds that one of the little-mentioned benefits of cash flow forecasting is the time it can save you. By planning ahead you save time, leaving yourself free to work on seeking out current market opportunities for your business.

“Digitisation of your accounts and moving to Xero with Float is so beneficial because the one thing that nobody can buy more of is time. You are buying yourself back time, because most small business owners are trying to do that sort of stuff themselves. But by actually investing, it gives you that time to do the stuff in your business that you actually enjoy doing. And that’s the really powerful part. That’s the bit that people don’t seem to really get,” said Richard.

Scenario Forecasting with Float image

As well as helping you decide what projects to take on, a cash flow forecast can help you keep your business as healthy as possible. Laura believes cash flow forecasting is key, particularly looking ahead to the next six months and March 2021 when a double-whammy of current VAT and deferred VAT will be due. She urges all business owners to plan for VAT bills before they happen. Laura is a big believer in scenario planning and thanks to the planning her and her clients had already put in place, when COVID-19 happened they knew exactly how they were going to deal with it.

In construction and trade, looking back at the past six months to work out the future six months simply doesn’t work due to the nature of the business. Instead your cash flow forecast should incorporate multiple ‘what if’ scenarios.

These scenarios could include, but are not limited to:

  • What if we win some new work
  • What if a project stalls
  • What if we don’t have any income for 3 months

It’s important to plan for the best, worst and middle case scenarios, so you’re prepared for whatever may happen. With a free trial of Float you can try out our scenario planning feature and build four potential ‘what if’ scenarios into your cash flow forecast.

How should construction and trade firms plan for the next 6-12 months ahead?

Both our webinar panellists were in agreement that nurturing client relationships is going to be essential over the year ahead. Contact your customers regularly and try to understand what their pain points are. You might be able to help, or know someone who can, and this support can strengthen their loyalty to your firm. You could also consider broadening your client base to minimise risk.

Richard also recommends looking at overheads and return on investment. He suggests business owners look at alternative streams of income, such as setting up a web shop, writing a book, developing a podcast, or offering advice and guidance for a fee.

And don’t forget that knowing where you are financially and knowing your numbers gives you the ability to sleep at night. So take control of your cash flow today.

“By knowing your numbers, it buys you a peace of mind. And that really is so important because that feeds into your mental wellbeing. And if you haven’t got that mental wellbeing from knowing where you’re at financially, then all of your decisions will start going out the window.” Richard Stone

Watch the webinar now:

Louise Bayley-Boyd

Digital enthusiast, passionate about helping small businesses survive and thrive.