Lewis Dunbar: Managing working capital carefully as we exit the pandemic
The recent easing of restrictions across most of the UK has resulted in a controlled resumption of travel, return to work, house moves and socialising in homes as we manoeuvre out of the COVID-19 pandemic. This has come as a relief to everybody, and none more so than those in the construction industry.
The prolonged period of restrictions has impacted supply chains, reduced the workforce and, in many cases, significantly delayed the completion of construction projects of all types.
The result for many businesses in the industry has been an increasing order book, growing demand and now pressure to fulfil the delayed or postponed contracts. While resuming a high level of activity is a significant growth opportunity, there are also the very real risks of overtrading, working capital shortfalls and liquidity problems on top of supply chain issues leading to cost increases.
Having made it this far, those in the construction sector must make sure they do not trip up at this late stage. The question is, how do we minimise this risk? Here are some key tips to do just that.
It is crucial for businesses to think carefully about their strategy over the coming months, including the projects they wish to undertake, considering all aspects such as the size, location, customer and profitability, as well as their own capacity to fulfil them. Doing so allows you to remain in control of the growth that can be achieved.
The importance of preparing and maintaining reliable, up-to-date and comprehensive financial projections, throughout this period of rising demand in particular, cannot be overstated. It allows you to plan your order book, identify and appraise the suitability and timing of opportunities and, very importantly, identify any potential funding gaps and understand your cashflow requirements. Financial projections should be continuously reviewed and updated to reflect any changes or new projects to ensure that the business can react quickly and effectively, before issues arise.
Consider funding options
Companies should be aware of all available funding options and working capital tools so as to select the most appropriate. There are a number of funding options available, which can meet any requirement across the sector, such as long and/or short term bank or other debt funding, invoice financing facilities, equity investment, or mezzanine finance, to name a few.
While it may seem the obvious approach to seek the cheapest finance offering available in order to reduce overall borrowing costs, this should not automatically be considered the best approach. Instead, it is important to find a solution which aligns most appropriately to the business’s needs and strategic direction. Having a finance provider that understands this will allow the flexibility and support to achieve the desired growth plans. Taking professional advice at the right stage can open up a number of financing options for your project.
Use the reliefs available
The UK Government announced a number of changes to Corporation Tax in the last Budget, the first of which came into effect from 01 April 2021.
This included the introduction of a ‘super-relief’ available on the purchase of ‘qualifying’ plant and machinery. It provides companies with 130% tax relief on the purchase of plant and machinery which would previously have received either 100% Annual Investment Allowance (AIA), to an upper limit, currently at £1 million per year or 18%, and applies to assets purchased between 01 April 2021 and 31 March 2023. There is no upper limit on value. An investment in the equipment that will improve efficiency and cut costs will also reduce the tax bill associated with improved trading.
Planning ahead, using available reliefs, considering funding options and ensuring you have reliable, comprehensive and up-to-date financial projections are some of the key ways in which you can ensure that you continue to manage working capital carefully.
Continuing to plan ahead and understanding what the future could look like for your business will enable you to act tactically and strategically while giving you the tools to react quickly where necessary. All of which will assist as we exit the pandemic and beyond.