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Everyone in construction knows how volatile the industry can be and how important it is to keep the extra funds aside that gives you that extra bit of breathing space for any unexpected situations or large contractors placing you on 60 day terms.
As it always has been, cash is king in business, if you are not in control of your cash position then you are likely to run into trouble. Forecasting for your business should be at the top of your list, knowing what’s coming with subcontractor payments, credit accounts for materials or keeping your overheads in line will give you the information you need to make key business decisions with confidence over your finances.
What Should Be Included In Your Cash Reserves?
With your bank account provider, there should be an option to set up separate savings accounts, here are some of the examples you can follow:
- Corporation Tax - Estimate how much profit you are expected to make for the year and multiply this by the corporate tax rate to give you an estimated tax bill. Divide this amount by 12 and transfer this amount to a separate account every month (set up a standing order).
- VAT - In construction, if you are dealing with contractors you are likely to be on a repayment basis with VAT ie HMRC are paying you every quarter (refund) however if you are working with domestic clients you will be paying HMRC VAT money. Work out your average 3 month VAT liability and divide this into 12 weekly payments and have the money automatically transferred so it is there ready to give over to HMRC. This money is not yours to trade with and can get you quickly into cashflow trouble if you do.
- Credit Accounts - Even if you have 30 days from the end of the month to pay suppliers, it is always beneficial to put this money aside so it is available to pay. If you have 3 credit suppliers that you pay 20k a month to, this is 60k. If you start overspending because you see an extra £60,000 in your bank account, again you will quickly run into cashflow difficulties. Take an average and put weekly amounts aside for material costs.
- Your money! - Put some money aside for your dividend payments so that when the time is right, you have the money available to take the money to live on. Every year you should be maximising the amount you extract from your company and paying the least amount of tax possible
- Personal Tax Bill - Don’t forget that when you extract a Dividend there will be dividend tax payable if you have gone over the allowance.
You can break down your expenses as much as you see fit, you can put the weekly money aside for your monthly lease payment, if you have a fleet of vehicles you can put money aside for servicing and repairs or you can generally start saving for something your business needs like new tools, new computer equipment or yearly subscriptions such as Constructionline, CHAS, Safe Contractor etc
The more prepared you are for what outgoings you have for your business, you can start looking at other areas in the business to take control of your finances such as yearly budgets, forecasting, and management information.
How Much Should Be In Your Cash Reserve?
A good guideline to go by is having at least 3 months worth of outgoings available in your savings. In an ideal world there would be 6 months of savings because say you lose your top client or they go under, how would this impact your business, would you survive?
Having the funds available to see your business through and make the next step in your journey will be vital to your success.
The same principle should apply to your personal expenses such as your mortgage, shopping, and household bills, what would happen if you could not pay yourself from your business? Do you have at least a couple of month's money put aside?
We understand that cash doesn't come out of thin air, but these expenses will be happening regardless. Budgeting and cash reserves is a crucial element of being financially secure and makes you aware of what your incomings and outgoings are and if something were to happen how prepared you would be?
By working with your Saint Accountant you can prepare and plan ahead for the best case scenario plus the worst case scenario if it ever did happen.
Bonus Tip
A good cashflow tip is when you order materials with your credit suppliers, typically we see large orders being placed towards the end of the month however if these orders are not urgent and can be delayed couple of days, say from the 28th to the 1st of the following month. This will now fall into the next payment month for the supplier so you have no gone from payment due in 32 days to payment due in 59 days
What's your accountant done for you lately?
Frequently asked questions
This article has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
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Written by the team at:
Construction Insider
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