Which is more important PROFIT or CASHFLOW?
More than half of the contractors answered “Cashflow” is more important than “Profit” as for construction business to work and make progresses, money is of course much needed “ no money, no progress”.
When the construction project stops moving or slows down in progress there will definitely be an increase in cost and a loss in profit. This problem is linked to business management which we have previously discussed in 10 rules in construction business management.
How to manage you cash inflow and cash outflow without any confusion?
first of all, carefully assess your customer (the project owner) choose a customer who has a paying power to work with by checking their financial history and their recent projects. If the customer’s history does not seem creditable enough then you will need to do a risk and cost assessment for that particular project. On the other hand, if your customer’s profile shows a good credit then the rest of the project depends on quality of your work.
Secondly, prepare your working cap at least more than 30% of the project cost in order to work smoothly and prevent the unpredicted cashflow problems, this can even help when there is a delay in cash inflow from our customer. Therefore, no matter how trustworthy your customer is, there might possibly be a risk or a chance that they will delay the payment due to perhaps delay in documents, delay in their cashflow and etc.
Lastly, manage your project cashflow by using this formula: cashflow= working cap + cash inflow – cash outflow. after planing your overall budget, the project will be ready to begin. All the payments related to project activities, material purchase, workers’ salary or general expenses would be recored as cash outflow and in order to run the project smoothly, the contractor would have to generate their cash inflow as well. In addition to this, the cash inflow should always be higher than cash outflow.
Where is that 30% of working cap from?
For construction business, the working capital is often raised from these 3 funding categories:
- Cash, customer deposit or operating profit that could be used as a capital for expanding your business
- Bank loans, project finance, O/D or factoring
- Credit term from suppliers
Importantly, the contractor must carefully consider and analyse the proportion of working capital in that particular project. Since each source of fund can directly affect your project profit in different way for instance, the construction work costs 100 millions baht and 30 millions baht is required for the working cap hence, 15 million is from your own capital and customer deposit, 10 million is from the bank and another 5 million is from credit term.
However, the majority of contractors (80%) still prefer to purchase those construction materials by credit since the materials often seem to be a lot and require a big amount of money thus, paying by cash all the time might not work. Another reason to purchase on credit is that, contractors must have some reserved money for the emergency issues for example: paying out for workers’ salary, subcontractor as these payments must be made by cash (NOT on credit). The cashflow manager should carefully plan and forecast their cash purchase and credit purchase in order to manage cashflow smoothly. The delayed payment also means delayed in work progress hence, pay close attention!
BUILK CostControl has been with us for roughly 7 years. In 2017, BUILK has added a new feature that effectively assists in cashflow management, this feature has been requested by our users.
Update payment status in the invoice
BUILK chooses a simple tool for users to track and control their cashflow. The Paid Unpaid tool allows the users to manage the cashflow that is similar to Spreadsheet. Apart from this, the tool also has an alert system in the dashboard in Cost Control function.
After usual purchasing order and cost record processes (create purchasing order – allocate – approve). Once the document has been allocated and approved, there will be a light blue box appearing above the document, it looks like a small piece of notes that shows financial status for example: waiting for payment, overdue payment, paid payment and even the document history.
Once the purchasing order and other expenses have been updated and recorded, the manager will be able to see and track the real-time cashflow situation without requesting that piece of information from accounting and finance department. The problem of long waiting for your accountant to respond will be immediately solved for example: you do not need to ask who else do we need to pay? or how much left do we need to pay?
New Dashboard in BUILK CostControl (2017)
the new feature separates payment status into two parts
- purchasing order (waiting for payment): is a purchasing order (cash/credit) that does not meet the deadline yet.
- purchasing order (overdue payment): is a purchasing order that has not made a payment after meeting a payment deadline.
Once you click on your payment status, it will show you all these information and that will be helpful for your business to smoothly run.
Cash Outflow Alert System
Once you have updated your payment status, you will now need to issue an order and record these costs as usual. The system will summarise the amount due in the next 7 days for the managers to see and plan their cashflow strategy.
Alert system in Dashboard of BUILK Cost Control
To summarise, cashflow and profit are both equally important in construction business. Cashflow is a breath of business that has inhale and exhale while profit is like blood that grows and feed your business, if there was no profit the business would not be able to grow further. Cashflow and profit are the two factors that are linked together and affected each other for example: an efficient cashflow management can lead to an increase in profit and a decrease in cost. Hence, for SMEs construction businesses that need a good management system for both profit and cashflow they should adopt BUILK program as a tool to manage and control their business. The program is FREE and the first in Asia.
