As house prices fall and many developments face uncertainty and cancellation, the construction sector is in for some tough times. However, this need not spell disaster if your company faces the danger with a few key changes.
Barry Knight, director at financial adviser Smith & Williamson, offers nine golden rules for keeping your company on track:
• Produce regular forecasts, at least quarterly, preferably monthly. Cash flow is the most important. Compare cash position and bank facilities. Make sure items of capital expenditure are identified well in advance. If you have undrawn bank facilities, consider drawing down and placing cash on deposit with another bank. Remember, cash is king and you only go bust when you run out of money.
• Move your cost base away from fixed to variable, even if at the outset it appears to cost more. If the business is facing a downturn and a possible fall in demand, there is likely to be excess capacity and costs which are variable will naturally fall.
• Ensure bonding facilities are committed and meet regulatory requirements. Stress test “default clauses”.
• Set realistic banking covenants. These should reflect the true risk of the business and should not simply be intended to achieve the cheapest cost of borrowing. Anyone who breaches banking covenants rapidly loses the confidence of their banker.
• Manage stock. Don’t hold on to old stock. It ties up working capital, so if it isn’t selling, discount the price and get rid of it. If stock doesn’t sell this year, it’s unlikely to sell next.
• Check out the competition. Keep a watchful eye on competitors and if you are doing something different (including buying), make sure you are right and they are wrong. Adjust your business model when required. (It is very unlikely that a small business can compete on price. It needs to differentiate on other aspects.)
• Be flexible and think ahead. Take account of changing customer trends and clients’ needs, and aim to adapt accordingly.
• Stay alert and be realistic. If you realise there is a problem, act on it and work out a solution that can be presented to creditors. Don’t just assume you can trade your way out of problems; more remedial action may be required. Recognise that banks, in particular, don’t like shocks.
• Ensure you are adopting best practice. For example, how good is your website in terms of ease of use and comprehensive information?
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