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finance 35


Cashflow is king for Solent construction firms


While the economic recovery is giving businesses across the Solent cause for celebration, Grant Thornton’s Kerry McKeown warns that some of the opportunities presented by the upturn can present dangers, particularly in the construction sector


The understandable desire to ’get back to work’ creates scenarios where businesses take on more than their cash facilities can cope with and run into difficulties as a result.


An article published this summer by the Financial Times (’Sharp drop in number of UK companies on brink of insolvency’ by Kate Burgess) stated that the number of companies showing critical signs of financial distress fell 39% from June 2012 to June 2013. Leading the recovery were construction companies.


More recently, insolvency trade body R3 recently released figures that showed 71% of construction businesses in the South East saw their risk of insolvency fall last year.


Clearly therefore the key to maintaining and maximising this recovery is a focus on possibly one of the greatest challenges the construction industry continuously faces – cashflow management.


This is not just a Solent-wide or event UK issue. It is in fact an industry-wide, global epidemic spreading from the US, across through the UK and Europe, all the way to China and Australia. And in true Darwinian fashion, the preponderance of casualties are generally the small and the frail. Nevertheless, while SMEs and contractors are usually those that are affected the worst, larger industry players are also not immune from encountering cashflow challenges.


CHALLENGES


The nature of the construction industry can make it a very cash-intensive and cashflow, if not closely managed, can fluctuate considerably. A few common pitfalls that can deplete and thus strain cashflow are:


• Timing delays such as making payments to employees, subcontractors or suppliers before receiving money from the customer for work done or the time between raising invoices to and receiving payment from the customer


• Not having robust controls and/or standard procedures over how project activities trigger billing on an accurate and timely basis


• Not actively managing cash, from expediting collections to management of the supply chain and staffing costs.


FOUR SIMPLE SOLUTIONS


1 A cashflow forecast This is so essential that to attempt to plan a project without one would be like trying


THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – FEBRUARY 2014


to plan a construction without a blueprint. Cashflow forecasts are by definition forecasts, and thus will rarely exactly match actual outcomes. However, in order to achieve optimum results, the cashflow forecast, after factoring in timing differences for payment and receipts, should run almost parallel to the project management of the work. This will provide a clearer picture of when the peaks and troughs of workload should coincide with the peaks and troughs of the project’s cashflow.


2 Alternative financing options


There are a number of alternative financing options provided by third parties that, even after fees, can be less expensive than taking out a commercial loan. Some of the most commonly used financing options are:


- Invoice financing – the invoice financier buys the debt owed to a company by their customer once an invoice has been raised. The financier makes typically about 85% of the value of the invoice available upfront and then pays the balance, less any charges (fees and interest) once they have collected the full amount directly from the customer.


- Invoice discounting – similar to invoice financing except rather than collecting the outstanding debts from customers, the financier lends money against the value of the invoices raised to customers. Once the debt is received from customers the amount borrowed from the financier is paid back.


- (Early) settlement discount – customers are incentivised to pay earlier than or within usual credit terms by receiving a


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discount off the total invoice amount from the supplier when doing so.


- Supply chain finance – when dealing with customers who are larger companies with typically higher credit ratings, a bank is notified by the customer once an invoice from the supplier has been approved for payment. The bank can then offer up to 100% of the invoice value to the supplier at lower interest rates than a commercial loan, with the assurance that the large company will pay the invoice amount to the bank within its usual credit terms.


3 An effective order-to-cash process


Raising timely and accurate invoices once project activities are completed and ensuring they are paid on time and in full within whatever credit terms have been agreed is critical to maintaining positive cashflow. Due to the long durations of construction projects, where possible, contracts should be structured with cashflow beneficial staged payments. Therefore, rather than waiting until the end of a completed project for the entire payment, smaller incremental payments should be charged once each stage/specified activity of a project has been completed. To capitalise on this benefit, invoices need to be raised as soon as project activities are completed to minimise the delay of cash inflow. Should there be any unforeseen changes or project variations leading to extra work or reworks this needs to be accounted for both in terms of time and cash requirement.


4 Taking advantage of tax relief programmes


Research and development (R&D) tax relief and credits give a tax advantage to construction companies undertaking qualifying activities. Construction companies need to prove they are either seeking to resolve technological uncertainties or seeking to make technological advancements to qualify.


CONCLUSION


Construction companies will hopefully continue to rise out of financial distress, however, even with a steady supply of profitable projects there is still a danger of becoming insolvent unless cashflow is managed effectively. It may be a cliché but the saying ’failure to plan is a plan to fail’ could not be more pertinent than in the construction sector.


Details: Kerry McKeown 023-8038-1160 kerry.r.mckeown@uk.gt.com www.grant-thornton.co.uk


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