While the coming months will bring new opportunities for construction firms to grow, they could also pose new challenges, particularly if new lockdown measures are introduced.
The recent Lloyds Bank Business Barometer reported an eight-point slump in July to -22 per cent after recording a 30-point rise in the construction industry’s confidence in June.
This just highlights the importance of having a long-term and holistic strategy on cash flow for contractors building a pipeline of new work amid such uncertain conditions.
By proactively controlling liquidity, effective cash-flow management gives businesses the financial headroom needed to deal with future shocks and quickly capitalise on opportunities as they present themselves. Here are some practical steps firms can take to help achieve this.
Taking a business-wide approach
Although it’s more challenging during highly uncertain periods, regular forecasting of cash flow and customer demand is fundamental to a robust cash management strategy. These types of projections should help contractors assess whether they have the liquidity to meet planned commitments over the coming months, and can inform purchasing or investment decisions.
Instilling and maintaining a business-wide focus on cash and credit control will also help preserve cash reserves and avoid tying up funds in excess working capital – the amount of money required for day-to-day trading.
As firms compete for new business, it is essential that they ensure their sales and procurement teams understand the potential working capital implications of using, for example, longer credit terms to make the business more attractive to prospective customers, or shorter payment terms to negotiate lower raw material prices from suppliers – steps that can both have an impact on liquidity.
Encouraging communication and collaboration between a business’s customer-facing teams and its finance functions can help ensure that credit and payment decisions are considered as part of a businesses’ overarching cash management strategy, and that all parts of an operation are working towards the same liquidity goal.
Improving cash flow
It will be critical that contractors take steps to understand how cash will move in and out of their business when undertaking new work in the months ahead.
Before agreeing to work, firms should consider a prospective project’s cash flow forecast and set clear parameters for the amount of resource or time allowed to build up before invoicing is required. This can support a strong working capital position by limiting the amount of time, money or materials tied-up in operations at any one time.
When it comes to payments, establishing clear invoicing milestones, agreeing them with customers and providing updates through regular communication can also help reduce the chance of payment delays. Specialist financial tools such as invoice finance can work in tandem with the above approach to release cash tied up in unpaid invoices without needing to wait for them to be settled, providing some financial flexibility.
Improve supply chain visibility to reduce risk
Materials shortages have been a significant challenge for construction businesses throughout lockdown. Construction News recently reported on persistent shortages of plaster and bagged cement.
Preparing for and managing disruption in the supply of both materials and services will help prevent project delays and minimise the resulting impact on cash flow. Businesses should take the time to carry out a full review of their supply chains, making sure to cover small suppliers as well as the major ones. They can then take steps to address identified risks, such as diversifying their supplier base where they source key materials from a single partner.
Developing a long-term, holistic cash flow management strategy will help construction businesses be more resilient to challenges, and agile enough to pursue new opportunities.
Ben Stephenson is head of invoice finance and asset-based lending in the Global Transaction Banking team of Lloyds Bank