Builder. Are you short on cash-flow in your building business? Finding it hard to get an overdraft for that construction job?
Adapting to a growing economy is exciting but raises a new set of financial risks. More jobs mean larger accounts, bigger bills and more financial exposure. Managing cash-flow is one of the key issues and many builders are looking to banks to help them make the most of good opportunities. Approaching a bank can be difficult. But…it doesn’t have to be arduous.
Builders and Banks have differing points of view
Builders and Banks have differing points of view especially about risks. You want to run your business so it’s easy to present it to the bank. Doing so is not hard and it also gives you insight into the health of your business at any one time.
Below I outline two typical things you may be doing that can cause your bank to view you as a high risk business owner. Change these actions and you will not only present better to bankers, but you will also give yourself a much better tool for measuring the performance of your company.
Action One: Not charging your business for your own projects.
For example, you purchase land on builder’s terms, and you build a spec property to be sold when completed. You put all the expenses through the books and allocate the build costs to an expense account in your financial system, as you would with any job. But there is no income to offset these expenses, at least not until the property is sold – which may be sometime in the future and (often) in a subsequent financial year. So your income looks bad and your profit and loss report is useless as a measure of your business’s operational performance – an important consideration for the bank.
Then of course while the build is in progress your cash flow is tight. It will come right when the property is sold, but until then it threatens to undermine the whole business. You wonder if it is worth all the stress and sleepless nights to say nothing of the risk. You need bridging finance – usually quickly. But that’s going to take time.
Consider yourself a regular customer of your business. Invoice yourself at retail value for all the work and materials you use in your project (as you would a regular customer). Then the overall performance of your company (as measured by the gross profit line on the profit and loss report – accrued of course) will be more accurately reflected in your reports. What’s more – if it’s bad then you know that your company is not performing well and you need to do something immediately – rather than wait until it’s too late.
Now of course this does not remove the cash flow problem (because you will not be paying your invoices until the property is sold). Nor does it put money in the bank. But it does give a simple picture of the performance of the business, and may improve your chances of attracting funding should your project be a good one and your performance history acceptable.
And it goes with saying that you should have your accountant involved to make sure that your accounts are set up properly and that tax implications are properly handled.
Action Two: Assigning capital expenditure to the profit and loss account
It’s not really as complicated as it sounds. It’s a common action especially when you are adding to or improving something you already own and you intend to hold onto long term. The problem is caused when you simply purchase supplies and labour out of your business account and use them for your investment.
Because you are allocating to an expense account what should really be allocated to an assets account, the direct expenses in your business accounts appear greater than they should and the gross profit in your profit and loss report is reduced. This is not good. You present as a bad risk for your banker. And because building businesses operate on slim margins, when your accounts show even slimmer margins, bankers get the jitters.
Review where your investment expenses are being coded and assign them to an assets account. When you do this they “disappear” from the operating part of your profit and loss report and show up on your balance sheet. Your accountant can help you set this up. They dream about this stuff!
Again, this does not add cash to your bank account, but it does show more accurately how your company is performing, and this is what banks review when considering your risk.
There is no questions that accounting is complicated. Accountants do earn their keep. But there is no reason at all why your day to day accounts should not work in your favour. By observing business basics and discipling your actions, you can actually create accounts that work in your favour.
Accurate accounts are not only good for bank presentation. When used properly they give you the edge – you know how your business is performing. And that has to be good.
Whats your biggest challenge in managing your cash-flow in your building business?