Head of Sales at InvoiceFair, Garry Holligan was asked to speak at this year’s National Construction Summit. One of Ireland’s premier expos, the Summit attracts upwards of 3,000 delegates every year.
The topic Garry spoke about was “Funding Construction Projects in a Turbulent World”.
Securing funding for projects in the construction industry has gotten more difficult over the past couple of years in particular. Global events like COVID-19 and the Ukranian War have had a dramatic impact on the cost of goods, transport times and delivery and the overall profitability of construction projects. This has led to a ‘softening’ of interest in funding from more traditional funders.
While the topic may seem very elevated, Garry brought the audience through some basic financial principles and explained:
If you don’t have a handle on some basic financial principles, a dynamic financial strategy plus a reliable source of funding, even the most successful companies are at risk of failure.
He went on to explain some key financial tools that everyone involved in managing complex construction projects should use in order to manage their projects effectively and, more importantly, profitably.
The CCC is a formula that measures the amount of time it takes to:
1. Purchase supplies
2. Turn those supplies into a completed project
3. Collect payment from your customer for that project
The CCC formula determines how efficient a company is at managing its working capital. Construction companies
Construction companies that have learned to reduce their Cash Conversion Cycle have more cash on hand and can therefore take on more projects and grow their businesses faster.
Establishing a precise CCC can be quite complex; However, to give the audience a simple guide of how you compare globally, Garry explained that InvoiceFair created this simple calculator and encouraged everyone to do 2 calculations – using the average times from before Covid-19 and now, to see what direction you are trending in.
Average No. of days to get your product from order to delivered to customer
Average No. of days credit your customer takes to pay you
Average No. of days credit your suppliers extend to you
Across the life of any construction project, the requirement to fund things like supplier costs, labour, raw materials and expenses ebbs and flows, before the project is completed and fully paid for
The point at which the highest amount of cash is required and the length of time it is required for during the life of a given project is known as the Peak Funding Requirement.
Garry brought everyone through an example based on real life data:
In this example, we see that the value of a ‘like for like’ the project has increased by 20%. So this company has actually managed to get an increased commitment from their customer. However, a number of things have changed. Raw materials have increased by almost 25%, overheads and salaries by 12% (modest – in reality probably a lot higher given energy cost increase).
The impact of this on gross margin is significant – the same project even with a large increase in budget is now making €700,000 less, which has a dramatic effect not only on profitability but also on cashflow.
If we say – again conservatively – that it is now taking 90 days to get materials landed and there is evidence that the customer is now stretching payment terms from 30 to 45 days; this means that this company now has a peak funding requirement of 8.4m for 135 days. They need to find funding for an extra €2.7m for an additional 49 days!
Armed with this information, you are in a much better position to understand what your Peak Funding Requirement on any given project is and for how long you will need working capital finance.
Because of the high costs of traditional funding, the construction industry has been actively searching for alternative approaches. Today, there are three distinct alternatives with a few flavour varieties:
Banks have a long history of lumping all construction-related businesses into the risky-borrower bucket – even more so in current times. Alternative Funders like InvoiceFair offer a more dynamic method of financing construction projects.
InvoiceFair provide a range of innovative funding solutions for businesses that can release cash at every stage in the credit cycle. So you can get access to funding when you need it most – during the project and not after it is completed! We do not require personal guarantees from Directors, we don’t implement debtor or geographic concentration limits and funds are released within 24 hours once approved.
Want to learn more about InvoiceFair and how our range of alternative finance solutions could give your business the freedom to fund your own future? Contact us here.