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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/

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.

Before joining The CFO Centre India in 2014, Rajarshi Datta had accumulated 18 years of finance experience and has a proven track record as a Chief Financial Officer (including at Clear Channel in India). Raj, now CEO of The CFO Centre India, has helped numerous SMEs improve their finance function and fast track their growth. In his time at The CFO Centre, one issue has remained a constant for the entrepreneurs he has met, raising funding. So we asked Raj for his top tips on raising funding:

How can I raise Funding for my business?

Firstly, you need to create a business plan and understand the gaps which are currently in the business. Figure out whether you need additional funds or whether your existing business plan can support your operations. If you feel that your existing operations aren’t generating enough gas and isn’t at a sustainable level, then this is the time to raise funding.

Make a business plan, analyse your business and ask yourself, “Can I wait for equity funding?” If you aren’t able to wait for equity funding, which typically takes time, then look towards debt funding. It will take less time to raise debt funding, however you will need to pay interest, which is an additional burden on your business.

Why should I raise equity finance/equity funding?

In India, the previous generation of entrepreneurs were predominantly starting their businesses because they had the money. Now with modern day businesses, a lot of entrepreneurs are starting their journey with a simple business idea. Typically they are bootstrapped for some time and reach a stage where they can’t continue to grow with their own money. This is a critical junction for an entrepreneur, if they’re not able to raise funding from an outside source then the growth will be stunted.

In order to get that boost, you need to look to an outside source. This is raising funding through equity finance is needed, however equity finance can take time. You need to create a business plan and share a teaser with the different types of investors you pitch to, who will take their own time. This process can typically take 3-12 months.

Why should I raise debt funding/debt finance?

For an entrepreneur, waiting 3-12 months to raise funding through equity finance might not be a viable option. If you’re struggling with cash and need to raise capital quickly, you should look to debt funding. If the entrepreneur’s requirement is low, they won’t go for equity funding. From an investor’s point of view if the amount is too small, it’s not worth their time and money. It’s easier for a business owner to go for debt funding and get the money from the banks or another source.

What are things to consider as a small business or SME before applying for funding?

Consider whether you need to raise funding. A lot of businesses don’t create a proper cash flow analysis and assume that they need to raise funding. Once they make the analysis, they may see they don’t need funding at all. If you feel that there is a need, the first thing to consider is whether you will go for debt funding or equity funding. If it is debt funding, then monitor your revenue generated from your products or services and decide whether for the next few months/years (depending on if it’s short or long term funding) it is big enough to cover an EMI. You don’t want to find yourself in a situation where your revenue isn’t enough to cover your own fixed costs, plus the bank interest and the principle which you need to pay.

Within your role have you come across any examples where raising funding has been crucial in helping a business go to the next level?

The clients we meet with will typically want to raise funding in some way. If we are working with a smaller company, at some stage when they are looking for further growth, they will need funding. This is a regular occurrence for us. CFO Centre India had an instance where a company, whose turnover was around 35 crores, were looking for debt funding. The owner was certain that they wanted to raise funding through unsecured loans. There was no security to be offered and they were not ready to give a personal guarantee, so we set about getting unsecured loans from various sources. In India there is a scheme the government introduced, through which we can get an unsecured loan of 2 crores, but it will not come from one financial institution.

We approached 25 to 30 NBFCs &  seasoned banks and raised an overall sum of around 6 crores, which was fully unsecured. Almost every client will need to raise funding through debt finance or equity finance at some stage, as most clients we work with are small companies looking at expanding.

What is the biggest tip that you can provide for a company looking to raise funding?

You need to be sure that you need the funding, you shouldn’t raise funding because other companies are. Once you are sure, you need to figure out whether you want debt funding or equity funding. If its equity funding, then make a solid business plan, which should clearly state the differentiation you’re making in the market. You need to be patient, and when there is a meeting with the investors you should present your story in a way that clearly shows you are passionate about your business.

Find out how we have sourced more than US$7bn in funding for our clients and how we can help you raise funding fast.

Register for your FREE Financial Health Check courtesy of The CFO Centre, or call us on +919967531075.

Andy Collier, Co-Managing Director of The CFO Centre, decided in 2002 that he wanted to move into a portfolio career. Since then, he has utilised his wide ranging FD experience to manage the North of England team within The CFO Centre, before recently becoming Co-Managing Director. He has encountered numerous companies who have needed help raising funding during his professional career, so we decided to sit down and discover his top tips on raising funding.

 

How can I raise funding for my business?

As an FD, we don’t go straight into the mechanics of how we’re going to raise funding. Typically funding is about oiling the wheels of a business. There are different types of funding: Short term, Medium term and Long term funding. So if you are asking the question about how you raise funding, you’ve got to ask what time period you’re talking about and what’s the purpose of the funding, which will give you a detailed answer.

What are the different types of funding that you can get?

Short term, Medium term and long term funding as we’ve talked about. Also types of funding based on different assets, some secured by the lender on debtors or fixed assets. The amount of funding available makes it a very confusing area if you’re not in the expert field.

What is Equity Funding?

Equity funding is very different to capital funding, which involves bank lending and invoice factoring etc. Equity funding is in the sphere of long term investment to accelerate the business to a different place. It’s a big decision for the business owner because they are relinquishing some control over the business to get the funding it needs. Which sounds negative, but it’s not necessarily. Equity funding is more appropriate at some stage in a business’s life than working capital funding. Equity funding typically is used to move a small business to a different level and fund major developments or long term projects. However there is a conundrum with the entrepreneur where they feel like they’re losing control.

What else should you consider before raising funding?

Understand where the business is going and what it’s trying to achieve. By understanding that you get the long term vision, then the relevant funding “bits” can slot into that model. The consistent theme of this discussion is don’t dive straight into the detail, work out the purpose and ask, “Why am I raising money, and what is the objective of raising funding?”

Is Capital Funding the same as Debt Financing?

Capital funding can be for capital projects, might be on a big fixed asset, a big machine etc. depending on your product or services. Debt Financing is a particular form of funding around the debtors of the business. When a business raises an invoice, it’s not in the bank until somebody has paid for that. There can be a massive gap before the invoice is paid, it could be a month…it could be two years. If it’s a long term project it could be a substantial amount of time before the invoice is paid. However it is an asset of the business and the business can borrow an advance payment of that invoice or a percentage of it. That’s how it typically works.

Within your role or your team have you come across any examples where raising funding has been crucial in helping the business go to the next level?

Yes I have, in some instances the business can’t carry on growing without the funding requirement, it’s a make or break decision. Some businesses need funding to survive, some need funding to grow. In both instances it’s the key determiner of whether the business will rise or fall. There’s an old saying that “cash is king”, if you can’t get real cash in you need to borrow that money as it fuels all the business operations.

Before you apply for funding, what are the key things that you would recommend to consider?

Work out the long term plan: What’s the purpose of the funding; has the business got credibility to go to a funder; has it got some assets and has it got security? However the most important thing, have you made all the internal things work (in terms of improving cash flow, debtors, creditors, etc.) before you go and raise finance? Raising funding often comes with a price. You have to pay interest, sometimes you have to give a guarantee, and the entrepreneur might have to secure their house against the law which is pretty scary.

If a company is looking to raise funding what is the best piece that you can give to them as a starting point?

Work with somebody who’s raised funds before and knows the whole of the market…i.e. an FD or CFO from The CFO Centre.

 

Find out how we have sourced more than US$7bn in funding for our clients and how we can help you raise funding fast.

Register for your FREE Financial Health Check courtesy of The CFO Centre, or call us on +919967531075.

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

If you consider what sets companies like eBay, Alibaba, Netflix, Google, Starbucks, Apple, Cisco and Dell apart from other companies, their ability to continuously innovate and create high growth will probably come high on your list.

So should the fact they’ve all successfully transitioned from start-up to scale-up status without losing their ability to be dynamic and entrepreneurial.

Then there’s the fact they’ve helped create thousands of full-time and part-time jobs throughout the world. Twenty-three-year-old eBay, for example, employs 14,100 full- and part-time employees while Google’s parent company Alphabet Inc. has 88,100 full-time employees.

In his book, Scale Up!, the FD Centre’s Chairman Colin Mills defines scale-ups as companies that have grown by 20% a year for a minimum of three years and which started the three year period with a minimum of 10 employees.

Scale-ups disrupt and revolutionise entire industries, according to a Deloitte & THNK report. “They embody ingenuity, innovation, and foresight,” its authors concluded after studying 400,000 enterprises worldwide.

There’s a common misconception that only startups can be innovative, dynamic and entrepreneurial. Yet as scale-ups like Google and Alibaba illustrate, that’s far from the case.

Perhaps startups attract more attention because there’s so many of them: it’s estimated that there are 300 million startups globally. By comparison, only a tiny fraction of startups ever survive long enough to make the transition to scale up, according to the authors of the Deloitte report.

“Our research shows that the chances of a new enterprise to ascend as a scale-up are around 0.5%, which means that only 1 out of 200 surviving new enterprises will become a scale-up. ‘Unicorns’ make up the even smaller subset of scale-ups; only 104 startups are valued over $1 billion.”

Those companies that do become scale-ups help to boost local, national and international economies. They provide direct, ongoing employment and that, in turn, creates more consumer spending which in turn stimulates the economy and expands the tax base.

Or as business guru and venture capitalist, Daniel Isenberg say in Scale-Up!, “One venture that grows to 100 people in five years is probably more beneficial to entrepreneurs, shareholders, employees and governments alike, than 50 which stagnate at two years.”

Contrary to what many policymakers believe, startups don’t help economies to flourish or cause per capita income to rise.

“The relationship between per capita income and entrepreneurial activity is generally negative, rather than positive as is often believed,” wrote Scott Shane, Professor at Case Western Reserve University, in Entrepreneur magazine. He referenced a Gallup Organisation survey which compared per capita Gross Domestic Product (GDP) with the fraction of the population that reported being self-employed in 135 countries. It showed that the self-employed fraction had a negative linear relationship with the log of GDP.

“That is, self-employment rates are lower in rich countries than in poor ones.”

But growing a company past the start-up phase is not without its share of challenges, whether they are related to employees, sales and marketing, operations, administration, or finance. Most importantly, if growing companies don’t have the right infrastructure to support their expanded operations, those challenges can become increasingly severe.

“While on paper, they may have the revenue, the manufacturing base or customer reach of a substantial business, the culture, the controls, the processes, the personnel and the leadership remain those of a much smaller business than they were a short time before,” says Mills in Scale-Up!.

“Worse, they haven’t yet accumulated the resources to build and maintain that infrastructure.”

If the situation is not resolved, the business will outrun itself (cash reserves will dwindle as it tries to meet the expanded demands) or get stuck (as the owner and employees find themselves unable to cope with the problems).

But if you revise your business model, you can overcome these challenges or even avoid them altogether.

“You need to consider your whole business model, because if you have a terrible business model, then the last thing you want to do is to start scaling it,” says Mills.

The CFO Centre’s part-time FDs or CFOs help clients revise their business model using a framework known as the ’12 Box’ approach.

It has three levels:

1. Operational
2. Strategic
3. Business Support

Operational

This refers to finance operations and focuses on two key aspects: cash and profitability. There are four boxes: Cash Flow Management and Profit Improvement (which generate money), and Internal Systems and Reporting (which generate time for management).

Strategic

This involves your finance strategy: how are you going to finance the business to achieve future cash and profits? The four boxes in this section cover: Risk Assessment, Strategic Funding, Strategic Activities and Exit Planning, and an Implementation Timetable.

Business Support

This involves crucial tasks such as compliance, tax planning and legal issues, banking relationships and outsourcing. In the case of The CFO Centre’s FDs (and the CFO Centre’s CFOs), they don’t carry out the tasks but instead, manage the work on a client’s behalf. They’ve built relationships with the right people in each country where they operate so that they can connect clients with the right supplier at the right cost when they need it, and then manage the work on their behalf.

Take the F Score: Find Your Future Challenge Areas

To help you identify which one of these 12 areas is a potential current or future pain point for your business, the FD Centre/CFO Centre has created a quick assessment form known as the ‘F Score’. (It will only take nine minutes to complete.)

The F Score features a series of questions built around the 12 Boxes, designed to identify your areas of strength and those which represent a gap. When you’ve completed the questions, you’ll receive an eight-page report which will reveal your current or future challenges. It will not only rate the performance of your company’s finance function but also uncover untapped opportunities for non-linear growth.

To discover how the FD Centre will help your company to scale up, please call us now on 0800 169 1499 or contact us here.

Free 1-1 Finance Session

Do you have a burning question about any of the following:

• Cash flow management
• Funding
• Profit improvement
• Exit planning
• Reporting
• Getting the most from your bank?

Book now for your complimentary 30-minute finance breakthrough session with one of our part-time FDs/CFOs. Get the answers you need to scale up your business.

Ask the FD

If you’ve got just one finance-related question and you’d like us to send it across to our team of top FDs, please let us know, and we’ll get back to you within 24 hours.