Tackling late payments and managing cash flow

Simon Shaw, Head of Property and Construction at Duncan & Toplis, has some suggestions for tackling late payments and improving cash flow management.

Cash flow issues can present themselves in any industry, but few are as exposed as the construction sector with every project juggling multiple costs. Tight deadlines, long supply chains and vast project timelines mean everything has a knock-on effect.

Delays in receiving payments from clients can lead to reduced reserves, which in turn can lead to a lack of funds to buy materials, pay employees and cope with unexpected issues such as soil problems or hidden utilities. Late payments can reduce the opportunity to secure future contracts and threaten project completion.

Construction businesses are frequently tasked with fronting a lot of the project cost before an invoice has been sent to the customer. As a result, effective cash flow management is critical.

In construction, cash flow takes on a particular importance – costs include paying for labour, subcontractors, material deliveries and permits, and all these overheads can be due at different stages of the development process so need to be allocated and managed as part of the project plan early on. Most construction projects rely on finances from external sources such as lenders or investors; the past few years have seen consistent concerns around inflation spikes that drive up the price of projects.

This makes costing a development even more difficult as lenders can impose penalties if they don’t see returns on their investment in suitable time, and interest costs can skyrocket the final project bill.

Get a handle on cash flow

For every obstacle, there are solutions you can adopt to mitigate and minimise the risk. Firstly, it is important that all parties understand and acknowledge the agreed payment terms, as well as details around approval and appeals. The terms should outline when final payment will be made.

Another administrative change that proves effective is setting up a clear schedule for invoicing, so paperwork does not delay the positive cash flow. Automated systems can make this process quicker and simpler.

Some issues can be out of your control, such as delayed payments from clients. This is why it is important to ensure your cash flow management includes reserves to anticipate and prepare for delayed income. However, don’t be afraid to charge for late payments, as this can easily derail your project.

The best advice is to plan well from the start – that includes thorough and honest payment and cost projections. Understand the lenders or investors’ terms and make sure they are realistic for your project. Also consider what your options are should cash flow problems occur at any stage in the process – and have a plan if they do. In preparing for the worst situations, you are increasing the chances of the best. 

For more, visit duncantoplis.co.uk

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