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Here’s another in our continuing series of ‘reasons for business owners to be cheerful’, based around a seminar session delivered to The CFO Centre by respected UK behavioural economist Roger Martin-Fagg.

Necessity. It’s the Mother of Invention, as we know. When the going gets tough, we all know how that phrase ends. But it is an undeniable fact that while innovation in general can happen at more or less any time, it’s when our backs are against the wall that we see these innovations actually put to valuable use.

So we emerge from challenging times armed with new skills and new tools with which to feed business success. For example, most of us are by now all too familiar with the concept and practice of video conference calling. We’re aware of the value of a dressed background, a well-lit subject, an adequate microphone and above all a reliable broadband connection – even if we can’t always attain them. It’s a skill many of us didn’t recognise or require 18 months ago.

The pandemic inevitably means that office working and commuting won’t dominate the working landscape as it once did. In a survey conducted after the first lockdown, 78% of employers said productivity had either stayed unchanged or increased, after home working was encouraged[1].

On a macro scale, the smart investment money is pouring into quantum computing technology, which will deliver transformational processing power and efficiency to functions such as back-office administration and operational support. It’ll mean white collar redundancies, but it’ll also mean leaner, more efficient businesses. Businesses that, since the Brexit deal was signed, will (bar the inevitable teething issues) continue to trade with Europe.

So, despite plenty of apparent evidence to the contrary, there’s a lot to look forward to in 2021 and beyond. More to the point, there’s a great deal to prepare for. Good luck and keep those glasses half full. And who knows, we might soon be raising them in a pub…

[1] https://www.alliancevirtualoffices.com/virtual-office-blog/remote-working-statistics/

Scaling your business depends on two factors: your company’s capability and its capacity to deal with growth.

To scale up your business, your company must be capable of dealing with a growing amount of work or sales and of doing it cost-effectively.

You need to know that your company can achieve exponential growth without costs rising as a result. It’s vital too, that performance doesn’t suffer as your company scales up.

You also need to be sure that your business systems, employees, and infrastructure can accommodate growth. For instance, if you get a sudden surge in orders, will your company be able to cope? Will you be still able to manufacture and deliver products or services on time? Do you have enough employees to deal with a surge in work or sales?

Scaling a business requires careful planning and some funding. To be successful, you’ll need to have the right systems, processes, technology, staff, finance, and even partners in place.

Identify process gaps

Audit your business processes (core processes, support processes, and management processes) to find their strengths and weaknesses. Find the process gaps and address them before you start to scale up.

Keep the processes simple and straightforward. Complex processes slow things down and hinder progress.

Boost sales

Decide what your company needs to do to increase sales. How many new customers will you need to meet your scaled-up goals?

Create a sales growth forecast that details the number of new clients you need, the orders, and the revenue you want to generate.

Examine your existing sales structure and decide if it can generate more sales. Can you increase your flow of leads? Do you need to offer different products or services? Is there an untapped market? Do you have a marketing system to track and manage leads? Is your sales team capable of following up and closing more leads?

Make sure you have enough staff to cope with an increase in sales. If you don’t have enough staff, consider hiring new employees, outsourcing tasks, or finding partners that may be able to handle functions more efficiently than your company.

Forecast costs

Once you’ve done the sales growth forecast, create an expense forecast that includes the new technology, employees, infrastructure and systems you’ll need to be able to handle the new sales orders. The more detailed your cost estimates, the more realistic your plan will be.

Get funding

If you need to hire more staff, install new technology, add facilities or equipment, and create new reporting systems, you’ll need funds. Consider how you will fund the company’s growth.

Make delighting customers a priority

To reach your sales forecasts, your company will need loyal customers. You’ll win their loyalty by delivering outstanding products or services and customer service every time you interact with them.

Invest in technology

Invest in technology that will automate tasks. Automation will bring costs down and make production more efficient.

Ensure that your systems are integrated and work smoothly together.

Ask for help

Don’t be afraid to ask for help from experts who have experience in scaling up companies. In an interview, Apple’s co-founder, Steve Jobs, said, “I’ve never found anybody who didn’t want to help me when I’ve asked them for help.

“I’ve never found anyone who’s said no or hung up the phone when I called – I just asked.

“Most people never pick up the phone and call; most people never ask. And that’s what separates, sometimes, the people that do things from the people that just dream about them. You gotta act. And you’ve gotta be willing to fail; you gotta be ready to crash and burn, with people on the phone, with starting a company, with whatever. If you’re afraid of failing, you won’t get very far.”

Cash flow problems put your company at risk.

Unless your company manages cash flow effectively and uses regular cash flow forecasts, your company is in jeopardy. Cash flow shortfalls mean:

• You can’t pay suppliers on time
• You can’t make debt repayments on time or at all
• You can’t buy new inventory to meet customer demand
• You can’t pay staff wages
• You can’t compete for new contracts
• You can’t advertise to attract new clients
• You can’t hire new staff.

This will have a knock-on effect on your company’s profits, market share, and brand reputation. It could even result in your company going into liquidation.

One US bank study found that 82% of business failures are due to poor cash management.

How to Fix Your Cash Flow Shortfalls

Fortunately, most cash flow problems can be resolved with help from the right people. They will help you to identify the causes of cash flow problems in your business and advise the best way to fix them.

To find out how to fix your cash flow problems and prevent them from recurring, grab your free copy of the “Cash Flow” report NOW!

Causes of Cash Flow Problems

Conditions that can impact your cash flow include:

• A fall in sales or a decline in gross profit margins. This could be a result of changing economic conditions (such as the most recent global financial crisis), increased competition, or a drop in demand for your product or service.
• An unprofitable business model
• Using a negative cash flow business model. You offer customers or clients credit terms of anywhere from 30 days to 90 days (or longer).
• Having excessive debt
• Having inadequate stock or credit and debtor management.

Your cash flow problems can be due to any of the following:

Late paying customers When a customer doesn’t pay on time, your business can experience cash shortfalls.

Poor debt collection processes Not issuing or chasing up invoices in a timely fashion can result in reduced cash flow.

Low prices If your prices are too low, but your expenses are rising, your company is almost certain to experience cash flow problems.

Low sales Too often business owners try to resolve poor sales by looking for new clients. But this incurs more costs in areas like advertising and marketing to attract those new clients.

Too generous payment terms Allowing customers to pay in arrears for goods or services received is a bit like giving those companies short-term, interest-free unsecured loans.

Overtrading Rapid growth means your company will have to invest in more stock, equipment, or hiring staff to meet demand. If you don’t have sufficient working capital, the company will experience cash flow problems.

Too much stock Every dollar or pound you have in inventory is a dollar or pound you don’t have in cash.

Too much debt If you’re overleveraged (when you’ve borrowed too much and can’t pay interest payments or principal repayments or meet operating expenses), you’re likely to experience cash flow problems.

Cash Management

Cash is vital to your business. Without it, your business won’t be able to pay suppliers and creditors and to meet its payroll obligations.

Finding and fixing the cause of your cash flow problems in your business and putting systems in place to manage cash effectively is vital for your company’s survival.

Your Guide to Business Financing

Getting external financing to fund your company’s growth will depend on your plans, how willing you are to give away a stake, and, therefore, control in the business, your eligibility, and the short-term or long-term funding you need.

How to finance your business growth

Bank finance

Banks can offer you:

• Unsecured business loans. These will have fixed repayments (including interest) over a set time frame. The amount and the interest rates will depend on the bank and your circumstances.
• Secured business loans. To obtain a business equity loan, you’ll need to offer your company collateral or assets as security (for example, property, inventory, or equipment). The amount you can borrow will depend on the value of the assets.
• Buy-to-let loans and commercial mortgages. These are suitable if you’re looking to buy or remortgage business premises.
• These are more suitable for short-term financial support when your company has a cash shortfall.
• Business credit cards. Again, these are probably best for short-term support.
• Invoice finance. It will mean you can access cash that is otherwise tied up in outstanding invoices. It’s ideal if your company offers long payment terms to customers or if you need to grab growth opportunities.
• Asset finance. This allows you to make small regular payments for an asset rather than a large, one-off payment. It is ideal If you want to preserve your working capital and generate income from an asset as you pay for it.

Angel investors and venture capitalists

If you’re willing to offer a share of your company or equity, you could approach third party investors such as angel investors or venture capitalists (VCs).

You might not have to repay their investment, but the share they will want in return is likely to be high.

Alternative investment markets

You could also consider alternative finance options. These include crowdfunding and peer-to-peer funding.

• Crowdfunding. In return for early access to your products/services, discounts, or an equity stake in your company, you can raise the money you need from a crowd of small investors.
• Peer-to-peer lending. You can borrow from individual small investors. If your application is successful, you’ll probably be able to borrow more than you would through a bank and access the funds quicker.

The criteria for the loan might not be as stringent as a bank, but the costs might be similar.

Is your company eligible for funding?

Banks and investors often use what’s known as the CAMPARI method to decide if your company is eligible for funding. That is:

• C This incorporates everything from your professionalism and brand reputation to your company’s record in repaying loans.
• A This is about you and your team’s knowledge and expertise and how successful you’re likely to be to generate growth from the financing that investors are being asked to provide.
• M This is about how well your business is equipped to meet your growth plans. Investors will want to see your Return on Equity (ROE), growth projections, your competitive advantage, detailed financial reports, performance record, and a comprehensive expenditure report.
• P Investors will want to know how you will use the funds and how they will help to boost the company’s financial situation or generate a profit.

For example,  if you have no liquidity in the business but need it to fulfil an order or if you need a type of machinery to be able to increase your product or service range.

• A This is about showing investors how you came to decide on the level of funding you’re applying for.
• R Investors need to be convinced you can afford any repayments. They’ll look in particular at your cash flow and profit margins.
• I This is all about showing investors you have a fallback position if things go wrong. They’ll need to be convinced you have another source of repayment should you need it.

The use of management dashboards to monitor management KPIs, metrics and other essential data points will allow you and your management team to make rapid, data-based decisions based on up-to-date information about your business.

A management dashboard provides you with a comprehensive snapshot of the company’s performance. This is critical since it condenses massive amounts of information into a one-page summary that can provide invaluable insight into the health of your company and help with executive decision-making.

It allows you and your managers to access the most relevant information instantly.

The data is represented graphically using tables, line charts, bar charts, sparklines, maps, or gauges so you and other users can see the information at a glance.

They also allow you and other users to drill down to investigate further if necessary.

Types of business dashboards

There are three types of business dashboards:

• Operational dashboards which emphasise monitoring. These reflect the business processes and help monitor KPIs.
• Strategic dashboards which emphasise management. They reflect the end status of a KPI or metric for a set period.
• Tactical dashboards that highlight analysis. They will help you to identify trends and to track how metrics have changed.

Finance dashboard

Your finance dashboard should offer a summary and interpretation of key aspects such as profit and loss, and cash management.

Sales and Marketing dashboard

Your marketing dashboard should provide insight into how successful the company’s marketing efforts are at generating sales and attracting and retaining customers. You should be able to see where people are getting ‘stuck’ in your sales funnel or pipeline.

Risk management dashboard

Your operation and safety dashboard should help you and your team to manage and prevent risk. It could include training and awareness, incident management, claims, compliance, risks for assets and projects, and hazard identification.

HR dashboard

Your HR dashboard should provide reports on internal metrics such as employee satisfaction as well as external metrics such as your company’s success rates for recruitment. Depending on the size of the organisation, it could also be used to track turnover and retention rates.

The benefits of using management dashboards

• Instant access to core business metrics

Users across your organisation will be able to access core business metrics.

• Consolidate data from across multiple analytic services

The management dashboard consolidates data from many data points in an organisation to provide one reporting interface. It will save time and effort typically spent on compiling reports, signing into different analytic services and then sharing the data to everyone in the company.

• Provide real-time updates

Since changes in data or values is reflected in dashboards, you can identify fluctuations in crucial business metrics when they happen rather than having to wait for daily or weekly reports.

• Align departments

Dashboards can provide metrics that are relevant to each department.

• Allow root cause analysis

If you spot unusual trends in your summary reports, you can drill down to find their root cause.

• Communicate and manage strategy

Dashboards can be used as agents to boost organisational change.

How to design the best dashboard

A well-designed dashboard will help improve your company’s productivity and save time, but a badly-designed dashboard will confuse users and challenging to share. It needs to be easy to use and to report the most meaningful data and insights.

That’s why it’s critical that you select the right metrics to display. Avoid the temptation to add as many metrics as you can. If you need to monitor lots of metrics, use dashboard tabs.

Keep the design simple to make it easier for people to read and to digest the information. Avoid using too many colours or fonts or different graphics. Group data in a way that’s relevant and which provides context.

To encourage as broad a range of users as possible, make the dashboard interactive with options to filter and drill down.

Decide the reporting frequency based on the type of dashboard you’re using. For example, structure operational dashboards so they provide daily reports and set up strategic dashboards to give a monthly or quarterly report.

As the UK emerged from lockdown 3, it was revealed that the amount of cash that the Chancellor of the Exchequer pumped into the economy to keep it functioning had hit new peacetime records. So it’s natural to ask the question: ‘How are we going to pay it back?’ There are fears that taxes will have to rise significantly, with corresponding negative effects on growth. But economic theorists offer an interesting and perhaps more encouraging perspective.

Like many leading world economies, the UK government follows Modern Monetary Theory. Essentially, the government central bank (the Bank of England) provides as much cash as the economy needs to prevent it crashing and burning completely. The economy continues to generate output, albeit at a reduced rate. Interest rates are kept low to encourage spending.

The idea is that maintaining the money supply allows spending on increasing productivity – on infrastructure and education, rather than welfare and pensions. The Bank of England can allow its client (the UK government) to take its time paying it back because, unlike commercial banks, it doesn’t have to turn an annual profit. So taxes shouldn’t have to rise until the business is well into its recovery phase – in other words when it can afford it.

The key is to avoid the policies of austerity. Tightening the belt a notch instinctively feels appropriate when business is poor, but according to Modern Monetary Theory, austerity can damage the prospects of future growth by starving the system of the resources for investment.

Secondly, while unemployment is very likely to go up – it already is, of course – it shouldn’t affect key economic foundations like the housing market too adversely. In fact, we’re currently seeing the opposite. Remember – the bank of Mum and Dad is the 10^th largest supplier of housing finance in the UK, and it’s not answerable to corporate shareholders.

The inevitable blockage in the flow of cash through the economy caused by lockdowns results in a build-up of cash at the source, because there’s nothing to spend money on. After a lockdown ends, there’s an immediate surge of money into the economy. As we emerge from the pandemic this is likely to be a significant feature of economic activity.

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.