Good news or bad? and the impact on cashflow

Regional director of Ultimate Construction Finance, Euan Bell, suggests companies should turn outstanding billings in to cash rather than waiting months for them to be paid.

Which do you want first, the good news or the bad news?

Well the bad news, as you may know, is that according to data from the Office of National Statistics, UK construction output took everyone by surprise by falling 0.2% in January, compared to December, when analyst were predicting a rise of 0.3%.

Further statistics from Markit/CIPS UK Construction Purchasing Managers’ Index (PMI), indicated that growth in Britain’s construction industry unexpectedly dipped to a ten-month low in February.

It also revealed that optimism among construction companies regarding business activity for the year ahead fell to its lowest level since December 2014.

But fear not…now for the good news!

George Osbourne announced mid-March that the Government is to accelerate spending by pumping billions into the construction of new roads, railways and housing so the economy doesn’t stagnate.

He lists loads of exciting projects across the UK, with quite a bit of emphasis on creating his much talked about Northern Powerhouse.

Whether you’re a ‘glass half full or half empty’ type will dictate whether you are concerned about the slow down or excited by George’s news. Either way both will probably have an impact on cashflow.

For those that have plenty of work on, the slowdown may have little effect on the volume of business in the short term. However many of those companies may be subcontracting for the bigger firms who are most likely to be the first to feel the pinch.

If they do, it will inevitably lead to them hanging on to their cash a bit longer, leading to a domino effect all the way down the line with the squeeze getting greater and greater, depending on your position in the ‘pecking order’.

It doesn’t make those smaller companies any less successful, it just means it’s taking longer to be paid for the work they have been asked to do.

This is compounded by the fact that SMEs in the construction industry are second only to the manufacturing sector in having the most unpaid outstanding billing, according to research by the Asset Based Finance Association.

Furthermore, when it comes to payment times, construction companies are treated the worst, having to wait an average of 107 days before their billing is settled.

Put these factors together and it results in an ever-increasing strain on cashflow.

One solution is to go to the bank to arrange or increase your overdraft limit – ‘blood and stone’ come to mind.

Another is to make the most of your assets, and by that we mean your outstanding billing, whether it is ‘Uncertified Applications for Payment’ or invoices.

By arranging an invoice finance facility these ‘assets’ can be turned into cash the next day. If you have earned it, why should you have to wait an average of 107 days to get paid? This will ensure problems being experienced ‘up the line’ will have less impact on you.

On the other hand, experience tells us that the extra work planned for the sector by the Chancellor could also put a strain on cashflow.

We have worked with many companies that have been asked to tender for a large project who have seriously considered turning it down because they could not afford to take it on.

That’s because they would have to recruit extra staff and purchase the materials to carry out the contract. With cashflow already tight it looked like a non-starter.

At Ultimate Finance we believe that successful companies winning new contracts should not be held back because they are being made to wait three months or more to be paid for a job they have completed successfully.

By using an invoice finance facility the outstanding billing can be turned into cash almost as soon as they are issued which means they can tender for the contracts and not worry about the consequences if they win them.

If you haven’t already done so, it would be worthwhile reviewing your working capital position and calculate the potential value to be released in outstanding billing. Then just think about how the company could benefit, and grow, if they were all paid now.

Ultimate Finance has offices across the UK.

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