The Importance of Working Capital for Construction Companies
Every contractor I speak with lately - no matter which sector of construction they’re focused on - is predicting a better market in 2015 and projecting revenue growth. This is great news for all of us, and we certainly hope and believe that profit margins will follow this upward trend.
However, it’s important to keep in mind that growth also brings risk and a need to finance project starts, as well as material and equipment purchases. Managing this risk by ensuring your company has sufficient liquidity in the short-term is essential. Delayed payments by owners can stretch working capital and drive a need to finance these payment delays with debt, should the liquidity contained on the balance sheet not be sufficient. This can drive up costs that were not factored into the price of the bid.
Surety losses increase as construction economies ramp up – most people would think just the opposite. Surety losses are often liquidity issues, pure and simple, and in many cases aren’t driven by bad projects. A stretched balance sheet is more susceptible to minor bumps, which can lead to major problems.
Make sure your balance sheet can handle the work you undertake and factors in unforeseen issues. Ensure payment terms with suppliers and subcontractors are manageable and somewhat flexible, if possible. Talk to your working capital lender about increased capacity on your revolver as a backstop. Don’t be afraid to ask a project owner or general contractor about how the project is being financed and obtain confirmation – you can always blame these sensitive questions on your surety company. And lastly, know who you are doing business with.
Economic expansion and, in particular, increased construction spending is music to all of our ears. Take advantage of this positive trend, but be proactive and diligent in managing the risks with an expanded revenue stream. The most important thing you can do to insulate your company from unexpected issues is build a working capital position that can provide a short-term, financial cushion. Manage cash wisely and work to increase revolver availability.
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