The economic news affecting the sector is unlikely to improve in the short term, with reports of further company failures and the Construction Products Association predicting a 12 per cent fall in construction output this year – the worst year on record.
With a further fall projected next year of approximately 3.4 per cent, this equates to around £12.5 billion of work being stripped away in the two years to 2010.
Yet, despite this doom and gloom corporates need to find ways of continuing to operate successfully; to steer themselves through the minefield of potentially falling orders and stagnant or worsening economic conditions.
Some factors can be outside your control but one of the primary reasons a corporate gets into financial difficulties is because it focuses on the sales lines but neglects the nuts and bolts of day to day management of that most essential commodity… cash.
Banks are obviously here to try to support the business community with their cash flow. However by relying solely on your bank you are potentially placing crucial decisions about the management of your business into the hands of third parties.
It is therefore essential that every business undertakes the right actions to get its own finances in order, to enable it to at least have some control over its own destiny and at least prove to its financers that it is doing its best to protect its cash.
There are a number of simple housekeeping measures that every business should consider to preserve cash in these difficult days – this is not rocket science but a simple checklist to be undertaken by every finance team:
- Procurement – Make sure you review how you spend your money. Are you paying cash for items that could be financed in a cost effective way for instance via leasing? How do you pay for everyday items like stationery, travel expenses etc? Are these cash purchases or could you use a purchasing card to obtain payment terms and to preserve your day-to-day cash
- Supplier terms – Is there an opportunity to negotiate extended credit terms with suppliers? By extending terms from 30 to 40 days on an average £1,000,000 of supplier payments you would free up over £300,000 of cash for the business.
- Debt Collection – make sure you are persistent about collecting money due to you. Businesses need to ensure they have robust systems to chase payments when due and follow up on all promises made by debtors. Customers tend to pay those people who pester them religiously.
- Cash Management – Do you have money tied up in subsidiaries/JV’s/overseas accounts which can be repatriated to your main bank accounts. Talk to your bank about how you can use electronic systems to bring back dormant cash into your main accounts to boost available cash or repay outstanding debt.
These are just a few things a business can do to improve its cash position. Most important however is to make sure you are in regular dialogue with your bankers about your ongoing cash flow. It’s key to engage in early conversations with your bank and advisors to ensure you choose the right funding solution to meet your business requirements. And ideally this needs to be a banker who has some understanding of what you do through detailed knowledge of the sector in which you operate, otherwise they could gain a misleading picture from the news headlines. At the present time, that generally isn’t very good.
Sean Dixon is head of construction services at the Royal Bank of Scotland