Take a look at the principles of cash management and how they can help you to stay in control with these tips from an accountant for builders in Sydney.
Have you ever sat down to a massive plate of food and eaten it all, even though you knew it was more than you needed?
The theory related to this is that the more you have in front of you, the more you eat. this can be applied to your construction business finances; the more you have in your bank account, the more you will spend.
When it comes to cash management, in our personal as well as our business finances, expenses will grow to match what’s ‘on our plates’ unless we find a way to actively manage them.
The key is to remove the temptation and keep your financial calories under control.
Take a look at some tips to do this in part two of our article on managing cash flow for builders.
The ‘bucket’ technique advocates setting up separate bank accounts for things like contractor payments and tax/GST.
With the money out of sight, you will be less tempted to spend it. You can add accounts for regular expenses (it makes it much easier to keep track) and then a ‘bucket’ which you put your profits into.
Some construction business owners do this down to the dollar, based on their budget and have several buckets. Others will use percentages, e.g. 1 per cent for profits, 30 per cent for wages (including their own salary), 20 per cent for expenses, 8 per cent for GST etc.
Take a look at some more cash management principles from an accountant for builders in Sydney:
- Have a cash buffer
This will ideally be three months of overheads. Ideally, you will be able to put this much cash aside but of course we don’t live in a perfect world. You may choose to have the money available through an overdraft or pre-approved line of credit which you reserve for emergencies.
Another option is to fall back on family or friends when you need funds fast, although this is of course not without its problems and you should always tread very carefully. If you go down this road, get an agreement about how you will repay the money in writing.
- Borrow to balance your finances
Instead of investing thousands upfront on equipment, arrange asset finance or lease what you need. Factor the repayments into your monthly budget and you will have better control over your cash flow.
If you take this approach, remember to match what you borrow with asset life; for example long term assets should be funded by long term borrowings rather than a high-interest credit card which will be harder to pay off.
What to do in a cash flow crisis
If you have been hit with a sudden expense that you weren’t prepared for, talk to your suppliers. Be honest, keep them up to date and let them know how you are planning to make the payments.
In this situation, it makes sense to review your expenses. Could a debt with a high-interest rate be refinanced? Could you negotiate or cut out any ongoing costs? Take a look at your ‘money out’ and review every expense, line by line.
You may have assets that can be sold… even if it’s the high-end ute you purchased when things were going well.
Finally, you can always look to borrow. Have a chat with a Sydney accountant for builders and a broker who can help you find a loan. Be aware of interest rates and fine print, you don’t want to sign on for something that will push you further into a hole.
Want to know more about managing cash in your construction business? Take a look at Managing cash flow challenges for builders: Part 1 or contact Imagine Accounting to speak with an accountant in Sydney who specialises in working with builders and construction companies.