The slowdown in Singapore’s construction industry is expected to persist in 2017 with many construction businesses expected to face challenges that continue to threaten long-term financial stability. The most recent report by the Singapore Commercial Credit Bureau presents a worrying trend and has shown that construction businesses continue to be plagued by deteriorating payment performance.
Poor cash flow management is one of the major culprits of insolvency in construction companies and is expected to be more prevalent this year. Cash flow refers to the inflow and outflow of money, and timing is critical for good management. Even in cases where projects are profitable, slow payments from customers can result in a negative cash flow that prevents it from sustaining the operations.
Case Study: How poor cash flow management can destroy profitable projects
A contractor is awarded a contract to build the basement and first floor of a building. The contract’s payment milestones are based on installation, which meant that payment will be disbursed to the contractor only when the first level is completed. However, construction started with the basement where the costliest work took place. The contractor soon discovered that the payments received could not cover the cost of raw materials and labour. The result is a negative cash flow that severely threatens project completion.
What construction businesses can do to ensure good cash flow
1. Do not be overly ambitious when bidding for projects
Businesses need to be cautious when they are venturing into a project that they are unfamiliar with. Finding out if subcontractors are equipped with necessary skills and expertise will help determine their ability to deliver on the work.
Without the confidence that work can be carried out smoothly, a project might end up being costly if hiccups cannot be solved swiftly and at acceptable costs. Additional expenses may also be incurred if there is a need to rectify poor work by subcontractors.
It is also important to review current projects to see if the business has the capacity to take on another project (in terms of manpower and financing needs). When bidding for new projects, businesses should properly quote project costs and prepare detailed costing plans. It is a good practice to use concrete numbers for cost estimations since there is often the likelihood of project overrun, errors and reworks. This ensures that resources are not overstretched and can cater to unforeseen emergencies.
2. Keep a close eye on project costs and review cash flow often
Instances of mismatching cash receipts and cash payments in construction are common errors that contribute to cash flow issues. As seen from the example in the introduction, businesses pay for materials according to normal trading terms but only receive payment when the work is done. At the beginning, there might have sufficient cash to sustain operations. However, an unexpected delay in the certification of work done or late payments by the customer can easily create cash flow problems that prevent the business from paying for materials on time, which further delays construction work.
For construction businesses that are already experiencing negative cash flow issues, they can consider increasing forecasting frequency (e.g. weekly or daily) so that updated cash flow movements can reflect an accurate position of the business’ financial standing. They should also ensure that there are adequate project financing measures or internal resources to fund unexpected expenditures.
3. Take advantage of credit lines and overdrafts from banks
Banks offer such services to help construction businesses finance projects or manage gaps in their cash flow.
Construction businesses taking advantage of such banking services are encouraged to establish adequate credit line with banks and to keep them updated of any changes in cash flow projections, especially if there are unforeseen situations.
4. Government grants
In addition to relying on banks for corporate financing, businesses can find out if they are eligible for government grants. The Construction Productivity and Capability Fund managed by the Building and Construction Authority offers the construction industry various incentive schemes to build capabilities and raise productivity. Businesses can tap on schemes such as the Construction Engineering Capability Development Programme and Mechanisation Credit to improve productivity in their construction projects. The Productivity Innovation Project scheme provides assistance to contractors who are trying to improve their site processes. This includes re-engineering of site processes, adopting of labour-efficient technologies and improving of site productivity.
5. Ensure progress certificates are received quickly
Invoices can only be issued when progress certificates, issued by Quantity Surveyors, are received. One of the biggest issues lies with receiving the progress certificates on time. This delays the billing of invoices and subsequently, the receipt of payment. Once work is completed, the firm should ensure that the payment certificate is received as soon as possible so that they can avoid late billing.
The importance of having a prudent cash flow management policy
Good cash flow planning and management aids decision makers in areas such as budgeting, project management, investments and capital financing. Instead of only focusing on profit margins, paying attention to cash flow will help identify potential problems early and help construction businesses better understand their financial capability in the long run.
This article was written by Ooi Qiu Wen and Quek Pek Lian, RSM.
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