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Insolvencies in the construction industry and the importance of managing cashflow

The construction sector remains the most significant contributor to insolvency statistics, accounting for 17% of all insolvencies in England and Wales in March 2024.

According to the Insolvency Service, 420 construction companies became insolvent in March alone and so far in 2024, construction businesses have made up 17% of all company insolvencies.

By comparison, in 2023, construction firms accounted for 14% of all registered businesses in the UK, suggesting the industry is still being disproportionately affected by insolvency.

These figures are no surprise, and as The Insolvency Service reported at the end of 2023, businesses within the construction sector are going bust at the fastest rate in a decade.

Some commentators estimate that there could currently be up to £1bn in bad debt within the UK construction industry and so even firms who are managing to keep their heads above water risk being dragged under by the bad debt of those who fail.

 

Why are there so many unpaid bills within the construction industry?

Where do you start with the pressures the sector is facing? …high interest rates and inflation (albeit these have come down a bit); staff shortages and wage pressures; impact of the cost of living crisis; high energy prices; supply chain issues… the list goes on.

Also, construction company owners are often not trained in managing finances. Financial skills are often learnt on the job, and so cashflow management can be a common issue amongst construction firms.

 

Managing cashflow in the construction industry

Effective cashflow management has never been more important than it is now. It enables you to forecast your future cash balances, to help ensure you have sufficient to pay your bills as they fall due, whilst also making sure you have enough cash in reserve to cover times when cash does not arrive as you would expect.

Cash flow forecasting is also important because if a business runs out of cash and is not able to obtain new finance, it could become insolvent.

We often come across businesses where financial difficulties have arisen because cash forecasting processes are either inadequate or non-existent. Often, an immediate improvement can be seen by putting in place a cash flow forecast, which helps to highlight any pinch points where cash is tight.

 

Why a cash flow forecast is important?

  • To identify potential shortfalls in cash in advance. The cash flow forecast gives an early warning enabling the business to address the situation before it is too late.
  • It ensures that the business can afford to pay suppliers and employees. Failure to pay suppliers could cause them to stop supplies.
  • Spots problems with customer payments—preparing a forecast encourages the business to look at how quickly customers are paying their debts and address any issues as they arise.
  • External stakeholders such as banks may require a regular forecast. If the business has a bank loan, the bank will want to look at the cash flow forecast regularly.

Properly managing your company’s cash flow is a critical part of running your business and, in the current climate, it is more important than ever.

 

Turnover is vanity, profit is sanity but cash is reality

You are probably familiar with this phrase and of course, having a profitable business is important but it’s necessary to understand that profit does not mean the same as cash flow, and just looking at profit and loss statements will not give you the full picture.

Effective cash flow management requires consideration of cash flow pinch points, in addition to profit and loss numbers. Just because your business made a profit does not mean that the business has sufficient cash.

Invoicing a customer creates turnover, and if the costs and expenses are less than than turnover, there will be a profit, but it is actually collecting the monies due from that customer that creates cash in your business. If you want your business to increase profits and grow, you should aim to structure your business to have a positive cash flow.

Cash flow reflects your overall business state and a negative cash flow, even where a business is profitable can push a business into financial distress.

By putting a cash flow in place and tracking it, you will be better placed to manage risk to your business and whilst you may not be able to control all the external factors affecting your business, you can control your actions and give your business the best chance of having a robust future.

If you need to help with working capital strategies, cash flow forecasting and management or sourcing funding get in touch.

 

How we can help

We need the construction sector to be able to lead the way forward, especially given the housing crisis we are in and our Business Recovery team is experienced in helping all types of business with cash flow issues from cash flow forecasting and management to sourcing funding.

If you are concerned about your construction company or a business which is related, get in touch with our expert and specialist team so we can work with you to help you navigate the best way forward.

It is essential that you act quickly though, especially if you are facing a cash shortfall or shortage of funds. The quicker you act, the more options there will be available to your business. Contact us for advice at enquiries@cowgills.co.uk, or via our website here.

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Disclaimer

The information was correct at time of publishing but may now be out of date.

Business Recovery
Posted by Cowgills
4th June, 2024
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