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Time for caution and care with the cash flow

An economic downturn means uncertain times for the construction sector, says Jonathan Hook.

House builders particularly can be the first to suffer, but other groups within the industry’s supply chain are also starting to feel the effects.

Reduced revenues and high input costs are forcing companies to face up to cash flow pressures. Anyone trying to negotiate or extend borrowing facilities in the current market will know how difficult this has become.

Capital intensive businesses like house building can take steps to ease the pressure. We are seeing people seeking to negotiate deferred land payment terms, mothballing unsuccessful sites, selling freeholds and pursuing more shared equity and part exchange deals to get slow sites moving.

Contractors of course typically operate off negative working capital; 10 per cent of annual turnover has historically been a good guide. Whilst this is a great model when business is growing, it means that the cash flow impact of a downturn will be more marked. As old jobs unwind and aren’t replaced with new work you can get bitten.

That said, contractors also need to avoid the trap of chasing volume at all costs and need to continue to price work sensibly.

Be wary who you work with

Choosing customers carefully and monitoring their financial position also becomes increasingly important in tougher market conditions. The public sector and blue chip corporates can provide order book stability as companies need to be especially cautious doing business with highly geared developers and those exposed to the retail and leisure sectors.

Tighter control and monitoring of the supply chain is also key. Who are you advancing cash to and why? Are your subcontractors showing signs of financial strain through their behaviours on site?

Reducing the number of subcontractors may have a bit more cost in the short term but makes it easier to monitor the exposure.

Downturns are not all bad news however. The well run companies will survive and may be able to pick up some great people, clients and projects from ailing competitors along the way. There are likely to be some corporate ‘bargains’ coming up for the bravehearted.

Jonathan Hook is UK construction and house building sector leader at PricewaterhouseCoopers