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Back in mid-2020, we were all still getting used to the fact that COVID-19 had pulled the rug from under all our best-laid business plans. We’d come out of our first lockdown, it was summer, the sun was shining (occasionally) and the low numbers in the daily pandemic updates rather massaged our mutual sense of community spirit: keep a stiff upper lip and it should be over by Christmas.

Well, here we are a year later. We’ve now emerged from lockdown number three. Mutated and even-more-virulent strains of Covid have put the nation’s heroic care services under unprecedented strain and are currently on the rampage elsewhere around the globe. It’s still cold and wet outside (in May at least), many have either lost their jobs or are furloughed. People are not spending very much money and many businesses are in a real fight for survival. In summary, there has been a pretty grim expression on the faces of most of the good business folk of the UK.

Some statistics suggest it’s not over yet. While the impact of the pandemic on the labour market may be stabilising as vacancy levels increase and redundancies decrease since their peak in September-November 2020, unemployment is still expected to rise when the Coronavirus Job Retention scheme ends later this year.[1]

But the recent news is better, for the UK at least. We now enjoy one of the lowest infection rates in the world and one of the most successful vaccination programmes. All that money that people haven’t been spending over the past year, on holidays, entertaining, travel, and such, is still there in the system, and as businesses cautiously welcome customers back, there’s evidence that people are ready to splash the cash.

If you’ve held out this far, and have made sound business plans for the future, there’s no need to panic. There will be life beyond the pandemic. But to enjoy it, and the things that really matter to you, your business needs to be in shape to make the most of the opportunities ahead.

[1] Howe of Commons Library research Briefing, 30 April 2021: https://commonslibrary.parliament.uk/research-briefings/cbp-8898/

Christmas is just around the corner and back home, we have finally put up and decorated our Christmas tree.  Like many people, Christmas has long become a special season for me, not only because of my religious belief or the history and meaning behind Christmas but also because it symbolises the ending of a year and it is a good time for reflection.

This year’s Christmas is going to be a special one as we are capping off an extraordinary year that many of us have ever experienced.  I started the year with high hope, especially when this year being 2020 and I often read it as 20/20, a term hinting to this supposedly to be a year that offers good vision and clarity.  But instead, for many people around the world including myself, this year has been filled with confusions, anxieties, and sadness, from loss of normalcy in our daily routines, loss of jobs and businesses and, in many unfortunate situations, the loss of loved ones.

Nonetheless, 2020 is drawing to a close and a new year is about to begin.  This offers the chance for all of us to start afresh with renewed hopes.  As challenging as it might have been, to some degrees, this past year has indeed offered many of us the clarity we need to start 2021 with confidence.  With the whole world having been forced to slow down, it has allowed us time to rethink how we live, our ways of doing business and the purposes behind them.  It has allowed us to recognise what really matters to us and realign our lives and refocus our energy.

For the past six years, through our work at the CFO Centre, we have come across many businesses, worked with many entrepreneurs and helped many businesses grow.  However, while our work naturally brings us to focus on numbers, we have also learnt that businesses, especially among SMEs, are so much more than just about growing revenue and making profits.  In most situations, businesses are founded and built on passions – the passions in founders wanting to revolutionalise an industry or to make lives better by introducing creative designs.  Also along the founders’ journeys in reaching their dreams through entrepreneurship, there are all sorts of human emotions that come along – joys and sadness, excitements and disappointments.  Businesses are not only about numbers on spreadsheets.  Businesses are about people living their lives and chasing their dreams.  At the CFO Centre, 2020 has allowed us to gain the clarity that our true purpose is about connecting with entrepreneurs and helping them live their lives they choose.

In about two weeks, we will be welcoming 2021.  I hope you have also had a chance to discover your purpose in the past year.  With clearer purposes, it is time that we put our thoughts into actions and start 2021 with our newfound passion and energy.  I look forward to building something together with you all and helping each other live the lives that we choose.

If you are looking to grow faster, your current way of doing your budgeting may well be restricting your growth plans way more than you think.

What if there was a much more organic way to think about budgeting? A way that doesn’t restrict and limit your business but enables the creative process and encourages innovation?

The following interview with leading FD, Phil Drury, explains through real-world examples why the concept of Beyond Budgeting is such a powerful innovation for the modern-day finance function.

Using sound management reporting and project by project accounting would make it easier for construction companies to get funding from banks and other financial institutions to grow and scale their businesses, says Simon Parkins, a construction industry accounting specialist.

Many construction businesses don’t invest in good management information, says Simon, who has over 20 years of experience in the construction sector and who is now a part-time FD with the FD Centre, the UK’s leading provider of part-time FDs.

Instead of making informed decisions about how to run the business based on facts, Managing Directors and their boards tend to rely too much on gut instinct, he says. That makes banks and other financial institutions wary.

Why banks and financial institutions don’t like construction companies

Getting access to external finance has always been challenging for construction companies because it’s perceived to be a very high-risk sector, says Simon.

The collapse of construction giant Carillion with £7bn debts just over two years ago has made lenders even more cautious about providing funds to companies within the sector.

“Carillion going bust made it even more difficult than it already was,” he says. “There were already banks who would not touch construction clients, but now even the ones who were open to construction companies have put a lot more hoops in place for them to jump through.”

SME construction companies are not particularly good at investing in management information or the accounting software that’s suitable for the industry, so they are often the first things Simon recommends they do.

Having access to the banks and financial institutions that will lend to construction companies and knowing what assurance and MI they want to keep that lending position in place is really crucial.

“I’ve got connections with some really good lenders who are not put off by construction, and they’ll improve their rates and fees on that the basis the FD Centre is involved,” Simon says. “They know that we will ensure the management information they need is there.”

“A lot of construction companies simply do not understand what the banks need to get finance, which is where we can help.”

Another reason why lenders find construction companies less appealing than other businesses is that the profit margins are often quite low.

Many of the top construction companies work with tiny margins of 4% to 5% while SME construction companies are more likely to have margins of between 10% and 25%.

Using project by project accounting practices

Many SME construction companies fail to put project by project reporting into place. This results in poor MI for the business, but also in an erratically performing profit and loss position, which scares lenders.

“A bookkeeper or accountant will put together management accounts for the business, but they often report on the whole business and not on individual and distinct projects.”

“The key to success in construction is really understanding project by project performance, so you can see which ones are performing, which ones are not, and which ones contain the risk. Doing that brings the performance of the business into clear focus,” he says.

“I worked with one client with a Commercial Director who the Managing Director regarded as performing quite well. He was delivering reasonable but not great numbers, but there was no transparency to what he was saying at the monthly board meetings. When we put project by project reporting into place, he had nowhere to hide. He was found to be deficient and covering up lots of problems and issues from the Managing Director.”

“Within four months of me coming on board as a part-time FD, the Commercial Director went from a position of nearly being assigned share options and some ownership of the company to the point where it was revealed he was fundamentally underperforming and probably losing that business something in the region of £100k to £150k a month.”

Construction accounting is very different from standard accounting and many good accountants get it wrong when tackling construction accounts for the first time, says Simon.

“As accountants, traditionally, we take the ledgers, we adjust for income not recorded (bringing in work in progress) and then we adjust for missing cost (accruals). Do this for a construction company without looking at individual project performance at your peril.”

“Traditional accounting in this way is problematic, and the following issues were common to the majority of construction SME clients I have worked with:

• Making income and cost adjustments without looking at individual project performance means there is no sense to check/validate the adjustments being made.
• The majority of risk tends to materialise or manifest itself at the end of a construction project, and so you need a system of reporting that reflects this risk and adjusts accordingly.
• The ability of the business to forecast the expected margin at the end of each project is often poor to moderate.

Clients believe that when they bring the income and cost adjustments together the accounts will be accurate. What you tend to find is that income is optimistic and overstated and that not all outstanding costs are identified. Coupled with poor visibility of the likely financial outcome of the project, and no consideration for risk, the accounting profit tends to be overstated.”

Too few construction companies allow for the problems that inevitably occur during a project.

“Nine times out of 10 profit-related things go wrong at the end of the construction project. There might be:

• Liquidated damages where you’re actually on penalty clauses to finish the project on time,
• Remedial works, an ongoing obligation to fix any subsequent problems which materialise with the work you’ve carried out,
• Snagging at the end of a job is when the client will point out problems with the work,
• Many companies underestimate the amount of work required to fulfill the snagging list for the client to be 100% happy.”

“It’s also just an industry in which people haggle at the end of the job.”

It’s for all these reasons that Simon tries to persuade clients to hold back some of the profit.

“I tell them to beware of ever taking the full margin until the client has signed the project off and physically paid the bill.”

While big construction companies have the systems and processes to put that all into place, many SMEs don’t have the knowledge or resources to do these things properly.

They might have accountants or bookkeepers, but they often do not understand well enough how to allow for how the construction industry works.

“It’s quite hard for an accountant without construction experience to know what to do or to understand the risks involved in construction,” he says.

“I have worked with many of the blue-chip companies in the construction sector for the past 20 years, and there are lots that I’ve learned along the way. A finance director in construction cannot sit in an ivory tower playing with spreadsheets. You’ve really got to understand project performance and how things are going on operationally.”

One client has a Commercial Director who was advising the monthly unbilled income figure and working with the accountant on the missing cost figure. They were adamant that the adjustments they were making were correct. But they had no mechanism for sense checking whether the adjustments were logical when bought together in the accounts. By introducing project by project reporting Simon showed them that their adjustments were very often incorrect. On one project they were reporting a 75% margin, on a project they were forecasting would make 35%. Moreover, the forecast proved to be inaccurate, and by the time the job was complete the actual margin achieved was 23%. With the job not even halfway completed they were already taking £250K profit on a job that ultimately only made £130K, and yet they were 100% convinced that what they were reporting was accurate.

Why construction companies need external funding

Much of the work construction companies do initially is self-financed with extended payment terms and that can put pressure on cash flow.

Projects can also go into a dispute which means cash flow can stop altogether.

“I had a client with a modest annual turnover of £6M who got into a dispute with a customer who then withheld a massive £1.2M. The work was delivered, but the £1.2m was withheld because a single piece of paperwork wasn’t delivered by a deadline.”

Many of Simons’ clients are SMEs who are working on four to eight live projects at any one time and are therefore highly exposed to each client.

“Their clients can quite often just withhold money on a pure technicality. The amount of cash they need for business operations hasn’t changed but their expected cash inflows can suddenly dry up. It is a difficult sector from that point of view.”

It’s therefore often a good idea for the construction company to have lending facilities on standby as a contingency to cope with any issues that may materialize. Approaching the bank, at short notice and with an urgent need for funds is rarely easy of a successful conversation.

If your a construction business needing some help/advice on getting external funding, reach out to us today at [email protected] and one of the team will be able to book a call with one of our dedicated Regional Directors to discuss more.

How can you get into the FinTech Industry as a new comer?

Gary Chan, CEO of CFO Centre Hong Kong, was a panel speaker at The Hong Kong Society of Financial Analysts Career Conference. Here are some of his tips:

Sara Daw, CEO of The CFO Centre Group, speaking on the future of work for portfolio professionals. Check out the video below: