This Article is part of an ongoing series where we take an in-depth look into the construction, engineering, building, and manufacturing sector.
Cash flow uncertainty and overcoming slow payments from customers
Overcoming slow customer payments is not a new endeavour for businesses in certain sectors. Businesses in the industrial sector like construction, engineering, building, and manufacturing are familiar with the cash flow uncertainty of a delay in receiving monies invoiced. The speed at which customers settle their debts continues to slow due to the COVID-19 pandemic, which prompted a tightening of the global economy. With fiscal year 2021 well underway, rethinking the reasons behind the sluggish resolution of balances owed can offer solutions to this ongoing pain point.
Adequate cash flow prevents businesses from needing to dip into credit resources any time they require equipment upgrades or other capital investments. Businesses in the Industrial sector often struggle with sub-standard cash flow. Whilst they are rich in assets, they fall short in day-to-day operations and short-term asset purchases.
Construction, engineering, and building businesses are particularly susceptible to cash flow issues due to the nature of their industry. Floating a project’s costs, coupled with supplying construction materials on terms and paying weekly wages, can cause cash flow to quickly run dry. Factors such as these can lead to insolvency. Then businesses are faced with the harsh reality of stunted growth and the inability to obtain funding to cover cash gaps.
There are no quick fixes for resolving sub-standard cash flow. Using organic means will produce the best outcome for achieving financial stability and maintaining long-term cash flow.
Economic Factors Complicating Cash Flow
Businesses in the industrial sectors are not strangers to economic factors and their influence on cash flow. The emergence and ongoing escalation of the COVID-19 pandemic are inarguably one of the most significant economic factors complicating cash flow. COVID-19 has exacted both immediate pressure and long-term challenges. There are several ways in which it is affecting these industries.
Supply chain disruptions
Australia and New Zealand have become more reliant on global suppliers in recent years, particularly in the construction, building, and manufacturing sectors. With China being one of the most prominent purveyors of materials and equipment, production and distribution slowed before coming to a screeching halt. Materials most affected during the slowdown included:
- Electrical and mechanical parts
- Plumbing fixtures
Projects that required higher volumes of these materials were the most affected. Whilst waiting for needed materials to arrive, businesses were forced to delay project schedules or pay a premium for locally sourced alternatives if available. All of these factors negatively impacted cash flow. Even as import and export operations have resumed in recent months, the backlog in filling requests will continue to cause disruptions to the supply chain and affect the readily available flow of cash for businesses in these sectors.
Supply chain constraints started a domino effect in these sectors, significantly impacting the cost of imported materials and parts. Combined with a weaker Australian dollar, it created the perfect storm for driving up prices. Some building and construction contractors have reported increases of 15 to 20 per cent for imported goods and directly attributed those costs to the declining Australian dollar.
Social distancing and other safety guidelines imposed as COVID-19 mitigation efforts also negatively impacted cash flow. The number of tradies allowed on site at one time slowed productivity by nearly half for most in the construction, building, and manufacturing industries. Whilst some states enacted new rules designed to alleviate the pressures associated with social distancing and other mitigation measures, it may not be sufficient for helping this sector return to full productivity levels.
Strategies for Speeding Up Customer Payments
Espousing the reasons for slow customer payments does not eliminate the issue. Trades businesses require strategies for effectively addressing this pain point. As previously mentioned, quick-fix solutions are not the best bet. Whilst they may stop the immediate bleed, they are never ideal for long-term cashflow management. Instead, focus on these three sustainable problem-solvers to remedy cash flow uncertainty.
Get money into the business
The most effective way to get money flowing into a business is by invoicing early and often. Have invoices prepared and ready to send the moment work is completed. A conditional lien should accompany every invoice, making it clear to customers the terms and conditions for timely payment. As the payment deadline approaches, send out a reminder notice of the payment and its due date, referencing the original invoice.
Get on better terms with suppliers
Collecting on invoices due is not the only way to improve cashflow. Getting on better terms with suppliers can help alleviate short-term pressure. Businesses may be able to renegotiate terms such as stretching out repayment into smaller, more manageable installations.
Get technology on your side
A large part of invoicing for businesses in the construction, engineering, building, and manufacturing sectors is including the right documents and proof-of-work. This is where a good Customer Relationship Management (CRM) system is indispensable. CRMs can proactively be used to draft internal notices and automated processes to ensure customers are contacted promptly about invoicing and other required documentation.
The overreaching lesson here is to be prepared and do not be afraid to use technology and other tools at your disposal to overcome slow customer payments. It will make the process more pleasant for all involved.