Budgets are an important tool a manufacturing company can use to help increase revenues, improve efficiencies of operations, improve services, and may even help to boost employee morale. Many believe budgets must be strictly followed to be of use, but this is not always the case. Budgets are ever-evolving and should be used to outline goals for a company and help guide owners throughout the year. The following are a few tips to help gain more from the budgeting process:
Before jumping into budgeting specific revenues and expenses, a company should develop a plan and specific goals. This plan can be built based on expectations from manufacturing industry data, staffing capacity goals, revenue growth goals, etc. Once a complete plan for the year is in place, try to build a budget to reach the goals. This should simplify the budget process by not modifying amounts multiple times as the goals are already in place before beginning the process.
A budget should be seen as a rolling forecast rather than a strict guide to follow. Assumptions made when initially creating the budget will be ever-evolving and may cause significant deviations from an initial budget. For manufacturing companies, a change in pricing for a specific material may cause considerable swings in costs and revenue potential. Using a rolling forecast, updating the budget each month or quarter, for example, can help to adapt during the year to reach the goals from the initial plan, or in some cases may help owners realize a new plan is required.
Utilize the Right Tools
Many of those who build budgets using an excel spreadsheet experience frustration with the formulas and passing the document back and forth to team members to make changes. Many of the accounting softwares used by manufacturing companies have built-in budgeting tools and can be used to simplify the process. This can lead to budget efficiency as the software can easily compare things to prior years and analyze current year results compared to the budget.
A single person should not create a budget; budgets work best when built by a team of employees. Allowing employees to have a say when making the budget helps to hold employees accountable. Consider bringing in employees from outside the management team who better know when machinery will need to be repaired or replaced. Allowing employees to have their voices heard may help to boost employee morale.
Share the Budget
Increasing the number of people who can see the budget leads to more feedback, better communication, and transparency. Budget to actual results can be an incentive for certain divisions or employees to increase productivity or limit spending.
Keep the expected cash flows in mind when creating the budget. If significant equipment purchases are expected to be made during the year, the cash required to make these purchases needs to be thought about ahead of time, and the expenditure should be planned to be made when the budget has built up excess cash. Ensuring there is enough money to pay for all expenses is an essential part of creating a budget.
When budgeting for expenses, it is important to understand which costs are essential expenses for the company and non-essential expenses. Those necessary or fixed costs, such as rent and utilities, should be entered into the budget before adding any non-essential or optional expenses. Another way of managing expenses may be to consider a change in vendors. Review each paid product and service when creating the budget, and consider whether a less costly alternative is available.
Manufacturing companies have unique challenges when it comes to financial management. Maintaining a realistic budget will allow you to make informed business decisions that will lead to continued success.
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The COVID-19 pandemic has caused significant changes to the construction industry and has forced them to reevaluate many factors affecting their businesses. Making cash flow strategies a priority is something every construction or contractor company owner needs to keep in the forefront of their mind. With the potential loss of work, change in timing for contracts, and fewer bid opportunities available, many companies have begun to experience tighter cash flow. Below we discuss three strategies that will help prioritize and improve cash flow in your construction business.
Construction Industry Cash Flow Strategies
1. Renegotiate Terms
a. Banks We recommend renegotiating the terms of your line of credit agreements or other long-term debt agreements. Interest rates have dropped significantly in 2020. If you have a minimum interest rate on any variable debt agreements, it may be an excellent time to review and renew.
Helpful Tips: i. Go into the renegotiations with a plan. ii. Do not be afraid to ask for a fee reduction. iii. Make the banker aware that you are monitoring the fees and will continue to do so. iv. Consider extending the length of your renewals. Many bankers prefer to freeze pricing for 3-5 years as it is less likely for the client to switch banks.
b. Vendors Renegotiate terms with your vendors, but do not only focus on price. We recommend negotiating a discount related to early payments, requesting extended payment terms, or paying with a credit card. These may help improve cash flow while maintaining a positive relationship with key vendors.
2. Accelerate Receipts & Defer Payments
a. Accelerate Receipts Bill early and often, as the contract terms allow. The sooner you can get invoices out, the sooner you are likely to receive payment. This includes timely billing and tracking retention. The collection of retention receivables is often not seen as a priority, as many take the “we will get paid when they get paid” approach. However, making retention a priority and taking the time to follow-up with outstanding balances can significantly improve cash flow.
Helpful Tips: i. Ask for payment when invoices become due. ii. Do not allow unpaid invoices to accumulate and grow old. iii. Consider adopting new policies and letting your clients know about it. iv. Examples:
All invoices are due on receipt or charge a penalty.
Interest for invoices that are unpaid within 30 days.
Discontinue work on a project if payment is not received within 60-90 days.
b. Defer Payments Consider asking vendors if they would allow your construction company to defer payments until a later date. Review your upcoming expenses and determine whether these items are required considering the current pandemic environment. Items such as capital expenditures could be delayed.
Review your insurance policies, phone plans, health care plans, and any other plans to try to find savings, especially if you have not done so recently.
3. Bring in New Money
a. Excess Inventory Improved inventory management is an easy way to increase cash flow. Liquidate excess or slow-moving inventory by finding a single large bulk purchaser or asking the distributor you originally purchased from to repurchase it all. Although you will likely be charged a fee to do so, this removes the inventory and can improve cash flow.
Construction industry companies should reevaluate how much inventory needs to be kept in stock. Reducing the overall value in inventory may result in a simple improvement in cash flow.
b. Sell Assets Review your listing of fixed assets to determine if any non-productive assets can be sold. These could be old items that have not been used for a while, or items no longer being used due to the pandemic’s reduced workload.
c. Investors Consider bringing in new investors to help with cash flow needs. Although bringing on new investors may take a lot of time and effort, it is a way to bring an influx of cash into the business. This may be an excellent time to consider succession planning for your construction company, and you may consider offering key employees the opportunity to purchase ownership.
Another way to bring in investment is through loans from the owners. This can be done through low interest and low-risk loans which can be paid back once business returns to normal. Loans from ownership may be required to be subordinated to any banks debt. However, this can be negotiated with your bank.
The construction industry should be reevaluating their cash flow and formulating a plan to get business back in operation. This process starts with a cash flow analysis. The above recommendations have only skimmed the surface of what construction companies can do to manage their cash flow.
Smith Schafer professionals can help. Our Construction & Real Estate Group, comprised of numerous professionals, is committed to serving over 800 Minnesota construction and real estate entities. From large construction companies to specialty contractors, we have the experience to bring you innovative solutions.
One of the biggest challenges facing small businesses is maintaining adequate cash flow. Even in periods of growth, it is imperative to monitor your company’s cash inflows and outflows. If you are not monitoring your cash activity, you could be almost out of business and not even know it. Here are 10 quick and easy tips to help improve your cash flows.
Send invoices out immediately. Many small businesses have a regular billing routine, such as invoicing customers at the end of the month. Instead of waiting to invoice, bill right away when the job is completed.
Ask for partial payment upfront. Or rather than wait until a job is complete, consider asking for a percentage of the bill to be paid before the work starts. Or break the bill into thirds, asking for a third before work starts, a third while the project is ongoing, and a third upon completion.
Change payment terms. Consider changing your payment terms for customers from 60 days to 30 days. In addition, you can offer a small discount to customers who pay their bills early and charge a penalty to those who pay late.
Get serious about collections. Make it a regular practice to review your receivables and identify accounts that are late paying or overdue. Then make the phone call or send out the letter requesting payment. Some customers just need a simple reminder.
Encourage the use of payment cards. If you do not already, consider accepting credit card and debit card payments from your customers. This allows you to potentially receive next-day payment for your sales and services.
Use electronic payments to your vendors. Consider paying your vendors electronically. That way you can wait until the morning of the day a bill is due to make payment. If you utilize this method, ensure you are tracking when payments are due so you do not incur late fees.
Use your business credit card. For a short-term cash flow solution, consider using your business credit card to make purchases or pay suppliers. Most cards offer a grace period of up to 21 days, and many cards also offer cashback features. It is important to pay these bills in full when they are due so you do not incur additional interest expense, which only makes your cash flow situation worse.
Consider finance instead of buying. This may seem counter-intuitive since you will end up spending more in the long run, but financing major purchases over a longer period of time will help maintain a cash stream for day-to-day operations.
Analyze your cash flow. Most companies go through cyclical highs and lows. A cash flow analysis may help highlight the cycles in your business. This information may be used in many ways, such as timing your borrowing, arranging the ideal amount of staffing, and boosting your marketing efforts during lulls.
Work with an accountant. The services of an accountant may serve as an investment rather than an expense. An accountant can review cash flow projections and results, provide insights into areas you may have overlooked, and help you anticipate and plan for cash flow problems.
These are just a few simple ways to improve your company’s cash flow. For more information on this topic or accounting and tax-related questions you may have, contact a Smith Schafer professional.