Public sector organisations squeezing construction suppliers to the tune of £1bn in retention and late payments
As insolvency practitioners and restructuring specialist we at Moorfields see a significant proportion of business failures and insolvencies arising as consequence of working capital shortfalls.
Working capital is the life blood of any business. However, having enough of it is not the only factor to consider.
For a commercial operation to run smoothly working capital must flow. Staff, raw materials, ancillary services and taxes must all be capable of being paid in a timely fashion to avoid adverse consequences.
Sub-contractors who haven't been paid are unlikely to return to the job until they have been and those pesky PAYE demands gathering dust can soon lead to a knock on the door from HMRC threatening to issue a winding up application. Explaining that your working capital is tied up in stock or debtors might buy a little time but is not a long term solution.
Reports today suggest that £1bn of construction supplier working capital is being tied up for an extended period by publicly funded organisations, placing a potential strangle hold on many small and medium sized businesses.
Of course, contractually agreed retentions are an industry norm and should form part of the cash flow model of any properly costed construction project. However, what if a dispute arises, and what to do about book debts remaining unpaid beyond the usual 30 or 45 days?
There are various way to deal with such issues and some golden rules to observe.
1) Forecast project cash flows using prudent and realistic assumptions.
2) Plan and provide for the unexpected.
3) If you lack the working capital to take on a major new project, do not commit until you have identified an appropriate source of funding. Overtrading can bring a business to its knees as quickly as under trading.
4) Seize on problems quickly. They are unlikely to resolve themselves in the absence of active management.
5) Talk to your customers and debtors, and remember - pro-active credit control should involve senior management, not just a credit controller sending standard letters.
6) Talk to your lenders about alternative and more flexible working capital funding. Ensure you are leveraging your balance sheet appropriately.
7) When the unexpected happens, take professional advice from an insolvency and restructuring specialist.
If you are having difficulties with your working capital cycle or a lack of working capital, contact us for some impartial, expert guidance. Our first meeting is free and there is no obligation.
Tel: +44 (0) 20 7186 1152
Moorfields is one of the UK's leading independent firms of restructuring and insolvency specialists. Our highly skilled teams include restructuring professionals and licensed insolvency practitioners who provide leadership, experience and high quality advice to companies and their stakeholders in financially distressed situationsView all Our News