Considering credit worthiness

Considering credit worthiness

Our finance director, Neil Washington, addresses the issue of credit worthiness and specifically how contractors like ourselves can make sure we remain as attractive to clients as possible. His comments were originally published on the Construction News website.

Following the news that the turnover of the UK’s top 100 contractors is back above the £60bn mark for the first time in five years, many contractors could be forgiven for thinking the future is rosy. However, moving out of recession simply means the risks we now face have shifted, and the implications for clients of selecting the wrong contractor remains as strong as ever.

Recessions are extremely painful. Over supply, low barriers to entry and lack of demand mean firms are forced to be intensely price competitive. Turnover can often shrink and businesses are forced to reassess their operating structures. However, reduced turnover can have a silver lining – contracting business’ main investment is their work in progress, so despite turnover and margins potentially falling it is possible for a responsive contracting business to sustain cashflows as its work in progress requirement shrinks. This can provide some welcome relief for a contractor under pressure, but what happens when the economic cycle swings and can clients finally relax about credit worthiness?

The risk to contracting businesses as the economy recovers are two-fold. Firstly, contracts that have been fiercely competitive to secure have been locked into at prices at the bottom of the cycle. Even with an annual RPI increase these prices can begin to squeeze margins if the industry’s inflation rate runs ahead, particularly if they are long term commitments. Secondly, for the recession survivors a rebound in demand will translate to increasing turnover.

However, now the work in progress equation works in reverse; rising turnover requires more working capital to finance contract positions. Thus a perfectly profitable contractor may find themselves in a cash trap – more investment is required, yet margins remain stubbornly thin and the business fails to self-generate the funds required to support the rising turnover.

As the mantra goes - cash is king, and many profitable businesses have gone to the wall because they managed profits but failed to manage cash. It is therefore critical that as businesses get used to expanding again they have a healthy eye on forecasting and managing their cash requirements.

For these reasons, it is as important as ever that clients when selecting their contractor continue to review the credit worthiness of those businesses they invite to tender. In doing so, they should be looking for companies where the current assets more than cover the current liabilities, with a well-funded balance sheet that does not rely on third-party funding, and one which remains profitable despite the challenges the new economy presents.

Sharing ideas and successes about Learning and Development


Paul Nixon, our Learning and Development Advisor has been bringing likeminded people together to share their ideas, successes and pains. Here Paul tells us more about the Learning & Development gatherings…     Why do you hold a L&D gathering and who attends? I have been attending a gathering of Learning and Development professionals for the past 12 months.  The group meets every month in Manchester which poses two challenges for me.  Firstly, there is the commute to Manchester which eats up time in my day and, secondly, meeting every month was too much of a commitment.  I’m also a born and bred Stoke lad who wants to see innovation and a sense of community being developed in my city.  There is a quite a varied group of people that attend, all contributing unique and valuable experiences.  We have individuals from ICO, Leek United Building Society, Vodafone and Water Plus along with one or two independent consultants.   What have the group been discussing? When I set up the group, I was very clear about its purpose: sharing the successes we’ve recently had, the challenges we’ve faced and discussing any new trends, ideas or opportunities that may lie ahead.  This means everyone has a story to tell and experience to share.  It’s a relaxed, informal setting where people can speak openly, build relationships and find support.  There are only two major rules: no sales pitches and no touting for business!   What are the benefits to bringing likeminded people together? As the only person in Learning and Development at Novus, the group has provided me with a great opportunity to meet likeminded people who understand my successes and challenges.  Equally, hearing the experiences that other people have had is encouraging and motivating.  Learning about how other people have tackled similar problems helps me to be more creative and innovate in my own workplace.   When do you meet?  We meet every other month, normally on the first Friday of the month, although this is flexible.  We meet in the city centre at The Quarter café, who have kindly allowed us to use a private space for free.  If anyone is interested in attending, please get in touch with Paul via email