The Civil Engineering Contractor March 2019 | Page 30

FEATURE: FINANCE
Overextending
working
capital: This is a catch-22 situation
that many construction companies
find themselves in when they are
handling projects. Having taken on
projects too large for their own
resources to cope with, they find
themselves both without the working
capital they need to continue with
the project, as well as having to
subcontract various aspects of their
projects to other companies —
which reduces profits even further.
The lack of working capital and
access to finance is a major constraint
on contractors at all levels of the
industry. In their report, Windapo
and Cattell found that the leaders of
successful firms interviewed were
unanimous in “acknowledging that
the specific strategy responsible
for their company’s development,
growth, and success, was their
decision to develop a strong financial
base for the company.”
Developing a strong financial base
— which is often described as a
28 | CEC March 2019
Ian Massey, director of MDA Consulting.
Raizcorp
Unclear profitability: Raiz
explains that often the profits
attached to a project is not as high
as expected. “This is due to a lack
of experience and understanding in
project costing. This leads to the
expected profits gradually being
eaten away by unplanned-for
expenses. The net effect is that profits
on big projects are often nominal, if
not ultimately negative.”
general building contracting,
property development and housing
development.” To ensure the
sustainability of their operation, a
construction firm should focus not
only on having a number of projects
at hand, but also on diversifying the
range of products and services they
offer. Michael Latchigadu, trade and
debtor finance head at Sasfin Bank,
shares the same sentiment, stating
that contractors should work towards
having a good balance of work
between the public and private sector.
Allon Raiz, CEO of entrepreneurial support company and incubator Raizcorp.
company having cash reserves of
between one and a half and two times
its monthly turnover — is not an easy
feat, particularly given the low profit
margins in the industry. It is made
even more of a challenge in the South
African context by the extreme delays
in payment that are often encountered
when projects are undertaken for
public sector clients.
To counter this problem, Candice
Pretorius, head of specialised and
capital equipment finance at Sasfin
Bank, advises that contractors
shouldn’t tie up funding once they
receive finance. “Instead of using
your cash flow and tying it into long-
term assets, rather keep it liquid,
because a new contract might come
up tomorrow and your funds are
tied up. Cash is king — you need
the availability in case that project
comes up.”
Financing mechanisms
Sasfin is an entrepreneurial bank that
competes with other commercial
banks by maintaining close relations
with clients and understanding their
working capital needs. It is therefore
the antithesis of the traditional bank
which, as the cliché goes, ‘gives clients
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