*Disclaimer: This blog post is guest content, which is independent of the FMB.
Some construction companies are facing financial gridlock due to the effects of the coronavirus pandemic, and having weathered unprecedented supply and labour shortages, leaving them with limited options but to secure their survival by increasing their borrowing.
Two years on since a pandemic was declared, the UK economy is restarting, businesses are reopening, and the housing market is settling down. Construction companies must now factor Covid-19 loan repayments into their outgoings which they may compensate for by raising prices, revising stock orders, and streamlining supply chains.
Jon Munnery, a company closure and rescue expert at UK Liquidators, shares unique insights on securing the future of a construction company as the economy recovers from the pandemic.
Effects of the pandemic on construction
Researchers at the University of Wolverhampton investigated the effects of the Covid-19 pandemic on the UK construction industry. Although most construction businesses, including sole traders and micro construction companies, may have formal or informal procedures in place to deal with business disruption, the effects of the pandemic have been far-reaching, such as:
- Significant cash flow issues
- Site delays due to longer planning application processing times fuelled by labour shortages and the inability to work remotely
- Shortage of materials which means significant lead times
- Reducing sales targets as builders take time off work to recover from Covid-19
- Halting technological progress within the sector
Dr Suresh Renukappa, Senior Lecturer in the Faculty of Science and Engineering at the University of Wolverhampton, said: “The historic issues within the construction industry have now increased due to COVID-19 where organisations have to maximise the efficiencies of their resources. However, this could have a positive effect on the industry enforcing companies to become more innovative and enhance industry 4.0.
“The issues within the sector intertwine, and therefore by reducing issues within a single area will consequently help other issues such as greater talent management and upskilling, increasing digitalisation, cost efficiencies and mental health and well-being. However, it is also imperative that organisations strategically learn from the pandemic, while using a proactive nature to future-proof their businesses.”
The pandemic squeezed company finances, so as businesses undergo formal restructuring to streamline operations, negotiate payment agreements to future-proof the company, or seek a cash injection to boost cash flow, their hope is to preserve the company from further financial distress.
Straddling the lines of insolvency
The risk of becoming insolvent sharpened during the pandemic as new financial pressures led construction companies into building poor credit and even defaulting which may have been avoidable by enforcing robust due diligence and credit control tactics. Late customer payments are a common pain point as they bite into working capital and deplete company cash flow which can rapidly lead to the downfall of a business.
The latest Begbies Traynor ‘Red Flag Alert’ report which assesses UK insolvency statistics found that the sector with the highest number of critically distressed businesses is construction, while the latest figures show more than 582,000 companies in significant financial distress, a 37% increase in Q2 22 compared to Q2 21. The construction sector is a major driver behind this increase, with a year-on-year rise of 70%.
3 ways building companies can get back on track
Here are three ways building companies can replenish their financial health.
- Debt recovery - taking a back seat when flagging overdue payments can increase the likelihood of incurring bad debts – this is when debts owed to a company are likely to go unpaid. Debt recovery measures to reduce exposure to bad debts range from staggering payment reminders, chasing payments and handling disputes.
- Business restructuring – if your construction company can be structured to operate more efficiently, business restructuring support from a licensed insolvency practitioner can help tap into this possibility. If the business is at risk of becoming insolvent, entering a Company Voluntary Arrangement (CVA) which is a formal payment plan with creditors can help bring company liabilities under control.
- Business finance - If you require a cash boost to pay suppliers, staff wages, or bills, commercial finance can replenish cash flow and keep the wheels of the business in motion.
The financial health and prospects of a business can rapidly deteriorate if you fail to seek professional intervention early, so while you’re ahead, ensure your business has the right processes in place to survive. For more information, visit Begbies Traynor Group, which is a leading business recovery and financial advisory consultancy.
*Disclaimer: This blog post is guest content, which is independent of the FMB. Publication does not constitute endorsement or recommendation from the FMB.
