Fixed-Term Contracts and Inflation: How To Safeguard Your Property Maintenance Business

inflation, fixed term contracts, safeguard your property maintenance business

Regardless of when you’re reading this article, protecting your property maintenance business against the risk of inflation should be a priority.

At the time this post went live – as global economies and supply chains try to recover from a number of hugely disruptive events – inflation is rampant. The resultant decrease in spending power means that many businesses’ profit margins are compromised.

Companies that enter into fixed-term contracts with their clients face an even bigger risk since they can’t respond to rising costs by increasing their own prices.

In situations like these, inflation won’t only stifle growth, it could threaten the existence of a company that may have been thriving under normal circumstances.

If you find yourself in this scenario, it probably isn’t necessary for anyone to tell you how vital it is to implement as many financial safeguards as possible.

In the Australian property maintenance world, the area where fixed term contracts overlaps with inflation is a rightfully scary space. That’s why the WorkBuddy management team put together a list of realistic strategies you can implement to safeguard your business the next time you find yourself there.

Know What Your Future Cash Flow Looks Like

Tracking your cash flow is critical during times of financial volatility. With expenses increasing, you can easily find yourself in a position where you’re not liquid enough to keep your business running.

Are you 100% sure that you can pay your bills next month?

It’s always important to know how liquid your business is going to be in the short term future. Even more so during times of heightened inflation. You have to get yourself in a position where you can reliably predict your next three months’ cash flow.

A cash flow forecast allows you to anticipate and plan for any potential cash shortages, ensuring you have enough funds to keep your operations running smoothly. 

Without a forecast, you may find yourself in a difficult situation where you’re unable to meet your financial obligations, putting your business – and your employees – at risk. 

Using cash flow forecasts to keep your business solvent in the short term is a relatively complex task with plenty of moving parts. We’ve listed some broad considerations and best practices below, but the topic definitely warrants some additional reading and probably the involvement of a financial expert.

  1. Start with historical data: Use the company’s historical financial records to identify patterns and trends in cash flow.

  2. Project future cash flows: Based on historical data and management’s expectations of future revenues, expenses and investments, project future cash inflows and outflows.

  3. Identify potential cash flow gaps: Once you have projected future cash flows, identify potential gaps between expected cash inflows and outflows. This can help to anticipate any short-term cash flow difficulties that your company may face.

  4. Implement cash management strategies: Based on the cash flow forecast, tactically implement cash management strategies like the ones we discuss in the remainder of the article.

  5. Monitor and adjust the forecast regularly: Continuously monitor the cash flow forecast and adjust it as needed to reflect any changes in the company’s financial situation or market conditions.

  6. Involve key stakeholders: You employ experienced people for a reason. Get your senior management, finance staff, and department heads involved in this conversation.

Include Provisions in Future Fixed Term Contracts

It’s unlikely that your customers will push back too hard against reasonable safeguards in your fixed term contracts with them. These stipulations are quite standard and should, at the very least, be on the table for negotiation.

Are you about to commit to a risky fixed-term contract?

Landing a new long-term client is a big deal for any business. Getting them to sign on the dotted line can have a massive impact on your company and your staff. Don’t let your preoccupation with finalising the deal get in the way of negotiating safeguards against the risk of inflation.

Here are four contractual mechanisms that companies commonly use to protect their long-term profit margins when entering into a fixed-term contract during a period of high inflation.

  1. The Price-Adjustment Clause
    This allows you to adjust prices if the cost of materials or labour increases during the contract period. 
    When including such a clause, remember that both parties need to agree on the basis of adjustment – the exact conditions under which the price can be increased.
    Other important stipulations include the timing of the adjustment (when and how frequently the adjustments can be made) as well as the Method of calculation (the exact formula that’ll be used to establish the new price).

  2. The Escalation Clause
    This clause stipulates that the contract price will increase gradually over time. Typically, the amount of each increase is determined by a formula that references an independently-maintained index like the Consumer Price Index (CPI).
    The main difference between a price adjustment clause and the escalation clause is that the latter isn’t contingent on a specific milestone. In simple terms, a price adjustment clause says that the contract price will go up in the event of a specific cost milestone being reached.
    Whereas the escalation clause says that the contract price will definitely increase at certain intervals, but the amount of the increase is to be determined at the appropriate times.

  3. The Contract Review Process
    This refers to a systematic evaluation of the terms and conditions of a contract. It’s used to ensure that the contract protects the interests of both parties and typically takes into account any changes in the market or other relevant factors.
    A contract review process doesn’t necessarily have to be included in the contract. But doing so can be beneficial since it provides a clear framework for regular evaluations of the terms and conditions of the agreement. 
    This can help to avoid disputes and ensure that the contract remains up-to-date and relevant over time.

  4. The Termination Clause
    This allows for either party to terminate the contract if and when it’s no longer beneficial to them. Including such a clause gives you the flexibility to move on from a contract that doesn’t make financial sense to you anymore.
    Termination clauses are very common in fixed-term contracts with the most common reasons for termination including “breach of contract”, “failure to meet performance standards”, and “force majeure”.
    However, it is generally considered good practice to include “changes in market conditions” and subsequent rising costs as another reason for a contract to be legally terminated.

Get Paid As Soon As Possible

Because purchasing power loses its value so quickly during periods of high inflation, it’s vital that you receive money for work completed as soon as possible. Doing so means that you can spend your money before it loses its value.

Are you notified as soon as work is completed?

You manage many subcontractors. And they’re all working on dozens of your job orders. They all have unique ways of working, reporting, and communicating. 

This means that jobs can get completed without your knowledge, preventing you from sending out an invoice and getting paid. 

Are you forgetting to invoice your customers on time?

Accounts processing (AP) departments are only as efficient as processes and systems that enable their day-to-day operations. 

With the amount of administrative overhead these departments have to deal with, it’s understandable that there could occasionally be an overlooked invoice .

To ensure that your invoices go out (and you get paid) as soon as possible, here are some practical steps you can take.

  1. Research and choose an online invoicing tool that meets your business needs. Look for features such as the ability to easily create and send invoices, track payments, and set up automatic reminders for clients.

  2. Integrate this tool with your current workflow. This will help streamline the process of creating and sending invoices to your clients. Most of these tools are very customizable and flexible enough to accommodate the processes and systems you already have in place.

  3. Train your team on how to use the new invoicing system and make sure they understand how to properly fill out and submit invoices. Any tool in this context is only as good as the users’ dedication to using it and its value to your business decreases considerably if your people aren’t using it properly. 

Do you wait too long for customers to pay invoices?

We’ve all been on both sides of this story. Sometimes it’s just not possible to pay an invoice. And sometimes you simply don’t feel like it. Regardless of the reasons your customers aren’t paying on time, you need to do what you can to prevent this from becoming a risk to your cash flow.

  1. Understand why invoices go unpaid: Talk to your customers. If you have insight into why they’re not paying in time, you’ll be able to choose response tactics that are meaningful to your business and your customers.

  2. Establish clear payment terms: Make sure that customers understand when payment is expected and the consequences of not paying on time. Include payment terms in your contracts and invoices, and make sure that customers are aware of them.
  3. Communicate with customers regularly: Keep customers informed about the status of their jobs and any delays that may occur. This will help build trust and ensure that customers understand the importance of paying their invoices on time.

  4. Implement a payment reminder system: This can be automated emails or phone calls to remind customers to pay their outstanding invoices. This will help to ensure that customers don’t forget to pay and also help you keep track of payment status.

  5. Offer multiple payment options: Making it easy for customers to pay, such as accepting credit cards or online payments, can also help improve payment timeliness.

  6. Consider offering discounts for early payments: incentivize customers to pay early by offering a small discount for early payments.

  7. Have a clear process for handling delinquent accounts: such as sending out past-due notices, and escalating to collections if necessary. This will help to ensure that delinquent accounts don’t go unpaid for long periods of time.

  8. Be open to negotiation: Sometimes customers may have valid reasons for not being able to pay on time, and in such cases, you may consider negotiating a payment plan with them.

Limit Expenses To Items That Have A Clear Business Case

When things are going well, it’s easy to agree to an expense because it “feels like something you need”. This approach isn’t a healthy one when inflation is rampant. You need to spend money on things that have clear, measurable value to your business.

Are you spending money on things you don’t need?

Your existing list of expenses can often seem like a black hole of financial information. 

Recurring payments that weren’t properly documented are common in many businesses, even those with solid financial records. Ridding yourself of unnecessary expenses is a time-consuming, but incredibly valuable task.

Here’s how we suggest you do it:

Audit all of the expenses that your business incurs, including fixed costs, variable costs, and overhead costs. Make an exhaustive list of everything you spend money on. Don’t overlook anything. 

Once you’ve conducted the audit, categorise your expenses based on their importance to your business. Identify expenses that are essential to operations and that provide the most value. Flag these as “essential”.

You’re also going to identify expenses that clearly have no obvious, measurable value. Don’t be sentimental or hesitant about culling these from your books. If there’s no reason to keep spending this money, don’t. Flag these expenses as “redundant”.

You’re likely to find a ton of expenses whose value to your business can’t easily be quantified. Unfortunately, you can’t just overlook these – they need to be categorised as essential or redundant. 

This is the most complex part of the process. Don’t go through the motions or just guess the value, there’s no point in doing this if you’re not going to be meticulous. 

To establish the value of such an expense, you can use a cost-benefit analysis. This involves comparing the cost of the expense to the benefits it generates, even if those benefits are not financial. 

Here are three examples of how the value of areas with “abstract” benefits can be assessed:

  1. Time savings: This involves evaluating the time saved by using a particular expense. For example, using a project management tool might allow your team to complete tasks more efficiently, freeing up time for other activities. You can quantify the time savings by comparing the time taken to complete tasks before and after implementing the tool. This can help you determine whether the cost of the tool is justified.

  2. Customer satisfaction: The objective here is to determine whether the expense directly or indirectly leads to higher levels of customer satisfaction. For example, investing in a customer relationship management (CRM) system can help you provide better customer service, leading to increased customer satisfaction and loyalty. You can measure the impact of the expense by conducting customer surveys or monitoring customer feedback.

  3. Employee morale: Investing in employee morale can have a direct impact on productivity and staff retention. For example, offering training opportunities, providing a pleasant working environment, and offering flexible work arrangements can all improve employee morale. You can measure the impact of these expenses by conducting employee surveys or tracking staff turnover.

Don’t be afraid to involve members of your staff to give their input during this phase of the expense audit. It might take a while but the long-term benefits are significant.

Are you planning on paying for things you don’t need?

Now that you understand the importance of establishing an investment’s return (and how to calculate it), it’s time to apply it to future expenses.

For expenses that exceed a certain amount, it’s vital that there’s some kind of oversight process to ensure that your staff aren’t making frivolous purchases or spending funds on unnecessary items. 

An approval process for expenses that exceed a certain threshold is an effective way to avoid this. Usually, this involves getting approval from a supervisor or manager before making the expense, or having a designated person or team responsible for reviewing and approving expenses.

This might seem like regulatory overkill to a business that likes to be agile, but during a time when cost-cutting is a priority, it’d be irresponsible not to be more diligent about this topic. 

It’s important to remember that an approval process doesn’t have to be overly restrictive or bureaucratic. It can be tailored to the specific needs of your business and can be adjusted as needed. The key is to strike a balance between ensuring financial responsibility and allowing for flexibility and agility in decision making.

Reduce The Principal On Existing Debt

Strategic debt payments could be more valuable for your business than having excess cash in your bank account. This is especially true when interest rates are going up and inflation is greater than the interest being paid on your savings.

Are Rising Interest Rates Hurting Your Business?

While it may be tempting to keep a sizable reserve of cash in your account during times of financial uncertainty, a better medium-term approach could be to use that money to lower the amount you owe to creditors.

The only way to do this is to make extra payments towards the loans. You can take any of the following three approaches:

  • Increasing the amount of your monthly payments.
  • Making additional payments throughout the year.
  • Making an ad-hoc lump-sum payment.

However, before you commit to these additional payments, it’s vital that your company’s finance department considers whether it is financially feasible.

It’s important to make sure that the additional payments won’t put undue stress on your company’s cash flow and budget. 

It’s also very important to review the terms of your loans to ensure that making extra payments won’t incur any penalties or fees. Some lenders want to maximise their earnings on debt and discourage additional payments using contractual stipulations like:

  • Prepayment penalties: This is a fee imposed by the lender for paying off a loan before the agreed term. It is usually a percentage of the outstanding loan balance, which can be substantial depending on the loan amount and term.

  • Yield maintenance: This is a fee that compensates the lender for the lost interest due to early loan repayment. It is calculated based on the difference between the original interest rate and the current market rate at the time of prepayment.

  • Defeasance: This is a process where a borrower pays a fee to the lender to release the collateral securing the loan, such as real estate. The fee is usually based on the present value of the remaining cash flows the lender would have received if the loan had not been prepaid.

  • Make-whole call: This is a provision in the loan agreement that allows the lender to call the loan due if the borrower prepays. The borrower must pay a premium, which is the difference between the outstanding loan balance and the present value of the remaining cash flows.

Negotiate With Your Creditors

Always remember that you are effectively a “customer” in the eyes of your commercial creditors. And, like all smart businesses, they want you to remain a customer. Get in touch with them to see if you can take advantage of concessions they’re willing to make to keep you happy.

Do you know if your lenders are willing to help you?

When it comes to quick, easy, fixes for short-term cash flow problems, nothing beats asking your creditors for a hand. You might be surprised how accommodating certain banks can be.

Here are some actionable steps you can take to negotiate with your creditors:

  1. Communicate early and often: Contact your creditors as soon as you anticipate financial difficulties. This will give them a chance to understand your situation and work with you to find a solution.

  2. Be transparent: Provide your creditors with detailed financial information, such as your income statement and balance sheet, so they can fully understand your situation.

  3. Be prepared: Before you meet with your creditors, have a clear and realistic plan for how you will address your financial difficulties and make sure you can demonstrate how the concessions you are requesting will help your business.

  4. Be flexible: Be open to different solutions and be willing to compromise. Your creditors may be willing to offer alternative payment plans, such as extended terms, reduced interest rates, or a temporary reduction in payments.

  5. Seek professional advice: Consider consulting with a financial advisor or a debt counsellor to help you navigate the negotiation process and to understand the best options available for your business.

When negotiating with creditors, it’s important to understand that different creditors may have different policies and procedures in place to help businesses during difficult times. Some of the ways a lender may be willing to help include:

  • Temporary Payment Relief: This can include a temporary reduction or suspension of payments, allowing your business to get back on its feet before resuming regular payments.

  • Loan Restructuring: This may include extending the loan term, converting a variable rate loan to a fixed rate loan, or changing the type of loan (e.g. from a term loan to a line of credit). This can help to lower the monthly payments, reducing the financial burden on your business.

  • Debt Forgiveness: In some cases, the lender may be willing to forgive a portion of the debt, reducing the overall amount your business needs to pay back.

  • Refinancing: Lenders may offer to refinance the loan with more favourable terms, such as a lower interest rate or a longer repayment period. This can help to lower the monthly payments and make it more affordable for your business to repay the debt.

It’s important to reach out to the lender, understand their policy and procedures and see what they are willing to offer. Many lenders have special teams or departments that are responsible for working with distressed borrowers. 

Be bold when asking for help. This is a very normal thing to do. Banks know that helping a debtor out is often better for them in the long run than squeezing every last cent out of a struggling business.

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