Protecting your cash flow: Key steps for small businesses to get paid on time

Ensuring timely payment is crucial for small businesses, especially in industries like construction where delayed payments can impact cash flow and project delivery. There are steps you can take to help you secure timely payment and protect your business from financial risks.

• Clear payments terms in written contracts - Start by clearly defining payment terms in your contract. Don’t rely on verbal agreements or other unwritten terms that are important to protect your interests. Specify when and how payments will be made throughout the project, including deposits, progress payments, and final payments and ensure they comply with relevant rules and industry standards. 
• Request deposits upfront - Requesting a deposit can serve as a financial cushion and demonstrate the client’s commitment to the project. In your contract, outline the terms for the deposit and any conditions for its return if the project is cancelled or altered. Deposits can also help cover initial material costs, keeping your business’s cash flow healthy. Ensure deposits are within regulated limits and you handle funds responsibly and in accordance with regulatory and accounting requirements. 
• Set up progress payments - Progress payments, based on project milestones, ensure that you’re compensated as work progresses. There are security of payment rules for construction contracts which can be found here. This method promotes transparency and accountability, as clients pay for completed stages rather than waiting until the end. 
• Withhold retention money for security and cash flow - Retention money is a small portion withheld until the project is finished to help manage cash flow and address any defects. This incentivises contractors and subcontractors to complete work to a high standard and assures clients that any issues will be addressed.
• Address delayed payments - If a payment is delayed or missed, first try direct negotiation, aiming for a solution that works for both parties. Alternatively, you can seek mediation through the NSW Small Business Commission, which offers affordable services to help resolve payment disputes. Other options include adjudication under the NSW Building and Construction Industry Security of Payment Act (SOPA), payment withholding requests, or, if necessary, court action.
• Register security interests - For added security, register your security interests in assets via the Personal Properties Securities Register (PPSR) before starting a project. This protects you as an unsecured creditor in case of insolvency, reducing potential losses if a client’s financial stability changes.
• Watch for warning signs of financial distress - Monitor for signs of financial trouble, such as delays in principal or head contractor payments or high turnover of staff. Proactively addressing these signs can help you secure your payments before issues escalate.

By incorporating these strategies into your agreements, you can safeguard your cash flow and minimise disruptions, helping your business thrive in a challenging economic environment. For additional support, contact the NSW Small Business Commissioner or consult the SOPA guidelines for payment security.