As published in the January-March 2023 issue of Master Builder Magazine.
Plenty of business owners have caught themselves looking at their business bank account wondering how much of that cash is actually theirs.
“Can I buy that new piece of equipment? Can I afford to kick off that reno on the family home? What about that overseas holiday?”
There’s no simple fix for answering these questions. Ultimately, the solution lies in having high-quality systems, reporting, and behaviours in place to provide clarity and certainty.
To get you started on your journey to financial clarity, these are the three most important steps to kick things off:
As the old adage goes, “ garbage in-garbage out”. The ideal approach is having a platform that will handle everything from quotes through to project management and invoicing – one that produces accurate and reliable data and connects directly with your accounting system.
As an accountant, I’m obviously all for spreadsheets, but in the long run you’ll burn time and risk data errors if you try to run your business through spreadsheets alone.
If you haven’t already, it’s time to look at moving to an estimating and project management platform. Our preferred software stack is Buildxact and Xero. You’ll save an incredible amount of time with a platform like this – and you’re working in an environment that will keep your data accurate and on-track.
With a good system in place for tracking line by line income and expenses for each job, you’ll have the data you need to build an accurate cashflow forecast, giving you clarity on what the road ahead looks like.
For builders with multiple jobs on the go the cashflow challenge is compounded. It doesn’t take long to lose visibility, particularly with delays impacting projects and the predictability of incoming cash.
And, once your cashflow forecast is built, it’s critical to keep it up to date! There’s nothing more useless (and dangerous) than an out-of-date cashflow forecast! I’d recommend updating and reviewing your cash position fortnightly or even weekly.
For those who are in “cashflow crisis” the only way to fight out of the hole is to update your forecast daily – we’ve got some really useful tools and resources we use with clients in this situation – please reach out if you need a hand!
The balance sheet is the ultimate score card for the “liquid health” of a business. Even so, it’s amazing how many business owners scratch their heads when it comes to understanding the role the balance sheet plays in building clarity.
Reflecting back on the original question of “How much of the cash in your business is actually yours?”, it’s important when you’re reviewing your balance sheet to have clear rules about how much cash you need to leave in the business to cover your upcoming expenses and unforeseen events.
In addition to what your cashflow tells you that you need to support your projects, I would generally recommend retaining two to three months of operating expenses and three months of wages for your key employees.
With a good estimating and project management system producing accurate data, a well-maintained cashflow forecast, and clear rules regarding working capital requirements, you’ll have the confidence you need to make a call on what you can then take out of the business.
If you need a hand implementing any of these recommendations or improving financial clarity in your business, you can call our CFO Advisory Team on 07 3124 8680.
