The cost of building activity has been on the rise, with the price for the construction of new dwellings increasing by 18% in the March 2022 quarter (compared to the March 2021 quarter) according to the Stats NZ Consumer Price Index. The higher demand for building activity in hand with supply-chain delays and higher labour costs are creating greater liabilities for business cash flow to cover.
Construction and Contracting companies need to accommodate the increasing costs to maintain a positive cash flow for their business. This may require a review of the current cash flow management systems in place.
Cash flow management strategies for rising costs.
Use financial planning and forecasting
Have a framework to keep track of finances coming in and out of your company to provide an estimate of how much you will receive in revenue versus how much you will spend.
As costs change, conduct a base-level six-month forecast by estimating the incomings and outgoings of your business based on your historical data to identify patterns whilst considering external trends in the business environment.
If your forecast is not suitable within your existing business model, discuss with your accountant how to restructure your financial model to allow for contingencies in the changing environment.
Adjust to regulate cash flow
Your business should have enough cash on hand to last you approximately three to six months. This way if construction costs for your business are higher than anticipated, there are contingencies in place.
Variability in wholesale prices means suppliers are passing through increases to customers. Product substitution, leasing equipment instead of buying and reducing your invoicing payment terms to encourage customers to pay, can help regulate the business cash flow.
Additionally, work with clients from the earliest stages of the build to identify products that may increase in cost or be in limited supply to avoid a project overrun.
Manage your company’s debt
Assess your debts on a regular basis. Look at repayment costs and decide whether you need to reduce or increase your debt funding.
Talk to your accountant to see if there are better ways for you to borrow by shifting your debts to a different lender.
Integrate accounting and business operations
Integrate financial data and building operations by integrating your accounting system with your building project. This will create agility to make informed business decisions based on up-to-date and accurate information.
This will also allow for financial planning and budgeting that can improve forecast accuracy to ensure maximum cash flow profitability against rising construction costs.
If you have any questions regarding the above, please contact your Walker Wayland Accountant.