The Civil Engineering Contractor March 2019 | Page 29

FEATURE: FINANCE
Lack of financial skills
Allon Raiz, CEO of entrepreneurial
support company and incubator
Raizcorp, says that civil engineering
contractors often share a weakness
with other low-margin, high-volume
businesses: a lack of financial skills,
or inability to afford people with
such skills. The result is poor costing
of projects. “Many don’t have a good
relationship with numbers, their
costing is sketchy, and they frequently
make less margin than they expect.”
Like many other start-up businesses,
the entrepreneur is a technical
person who loves what he does.
Unfortunately, a business involves not
just technical skills but the full panoply
of proficiencies, from accounting to
marketing and administration, which
www.civilsonline.co.za
a single person is unlikely to share.
While other advisers prescribe a
minimum working capital, Raiz say
this is unlikely in practice and an
entrepreneur can simply aim to have
“as much capital as possible”.
He urges prospective business
owners to look for an investor as
early as possible — because often its
financial position only gets worse over
time. With its poor financial skills and
costing, it often occurs that a business
makes a loss on its initial contracts,
steadily eroding its working capital
until it finally seeks an investor. By this
time, their books might not justify the
entry of any prudent investor.
Things to avoid in building
a contracting business
Single-project focus: Raiz lists this
as one of the most common mistakes
he has witnessed by construction
business start-ups. Firstly, many small
construction companies spend all
their time and energy on bidding
for and servicing large projects.
Allied to this is that single focus
leads contractors to becoming simply
project-based operations, making
them highly susceptible to a feast-or-
famine situation. When their single
big project is finished, many such
companies do not have a pool of
smaller projects that will sustain them
until the next big opportunity arrives.
“This comes about when a contractor
is desperate for business, and rushes
in to accept a project without reading
the fine print. The contract may
require the owner to be on site
throughout the contract, inhibiting
him from hunting for other work.
When the project is complete, only
then can he start to look for the next
job. This unproductive gap consumes
the profit made, often resulting in
letting go skilled staff, so that when he
gets the next tender, he is effectively
starting from scratch to hire new
staff. There is no accumulated core
of experience. The single-project
focus must be avoided by dedicating
time to look for new opportunities
continually, even when at work on a
large project,” says Raiz.
Lack of diversity in offerings:
A report published in August 2011
by two members of the University
of Cape Town’s Department of
Construction Economics and
Management, Dr Abimbola Windapo
and Prof. Keith Cattell, indicates that
“the ability of a company to grow,
improve turnover, and gain greater
market share is linked to its ability to
diversify its services and products.”
Most of the successful companies
that were surveyed were “active
in at least three types of product/
service markets — most commonly
in civil engineering contracting,
not seen them calling special AGMs
to approach shareholders for capital
— so it will show as a loss and
may be a contributing factor to their
insolvency.”
Massey notes that unlisted
companies do not have the ability to
go to shareholders for more capital
and are therefore completely reliant
on accumulated profits. “The case
of start-up and BEE companies is
therefore a major challenge, given that
construction is a high-risk business.
Fifty to sixty per cent of monthly
project expenditure has to be funded
out of working capital and is often
paid out 30 days later — if they’re
lucky,” says Massey.
Late payment is a major issue in
the sector; one that shows no sign
of improvement, “Though it can’t
get worse,” says Massey. “We have
to resolve this. The people who are
responsible for paying contractors
have a contractual responsibility to
do so, a duty which has nothing to do
with their internal systems.”
One means of raising working
capital — that of crowd-funding —
is a non-starter in South Africa, he
says, because of the risks associated
in South Africa and because of our
financial regulations.
Michael Latchigadu, trade and debtor finance head at Sasfin Bank.
CEC March 2019 | 27