Continuing inflation and a looming recession remain of the utmost concern to chief financial officers. Recent research from IWG found that 91% of CFOs surveyed believe an economic crisis is inevitable, with more than a third (36%) predicting a recession this year. As a result, almost all (97%) have started implementing or plan to implement cost-cutting measures.
And finance leaders at construction businesses—which face volatility in the most favorable macroeconomic conditions—are feeling this strain even more acutely than other industries.
Beyond labor shortages, the increasing cost of materials, and some existing supply chain issues, many construction companies are struggling with ongoing cash flow issues in an industry where cash is king. And if CFOs’ recession predictions prove true, construction businesses may soon be staring down cash flows in the net negative as funding sources and revenues both shrink.
Adding to that, historically low interest rates during COVID spurred a construction boom. Now, as the Fed raises interest rates in an attempt to tamp inflation, construction businesses are paying more on the debt they accumulated. Construction finance leaders who aren’t able to evaluate these factors within the bigger financial picture and were not able to anticipate these challenges through “what if” scenario planning, may be facing stalling projects and upside down balance sheets.
Since the last U.S. recession in 2009, construction businesses have predominantly forecasted growth. Now, finance leaders need to be more strategic and have a focused effort to best determine where they will be in the coming months. To best prepare their businesses and bolster productivity during these periods of volatility and constrained cash flow, construction finance leaders have to plan at a detailed level, across various scenarios.
In the past—and, in many cases, still today—financial planning in construction organizations was spreadsheet-driven. This limits the ability to project and nimbly make “what-if” assumptions, which is critically needed in a tumultuous economic environment. Spreadsheets or “pen and paper” planning doesn’t allow the kind of flexibility needed today.
It’s essential that finance leaders not just create one plan but evaluate various future scenarios. Without this approach, if a wrench is thrown into the one plan, with no contingency options, there will be no ability to easily and effectively pivot and make data-driven decisions for the organization. With the right tools, finance leaders can seamlessly plan for multiple potential scenarios, even down to the individual job level, and not only be more prepared but also proactively guide their companies to remain in the black.
Cloud-based financial planning & analysis (FP&A) tools allow construction finance leaders to provide their businesses with multiple scenarios to best prepare them for a successful outcome despite ongoing inflation and a possible recession. With the flexibility in planning afforded by these kinds of tools, finance executives can make adjustments and quick decisions on the fly based on sudden or potential shifts in the economy. For example, if the cost of goods increases by 10% due to inflation, these types of tools let construction finance leaders more effectively incorporate those costs and plan accordingly.
These solutions also empower finance executives to look back on the effectiveness of previous actions forecast more accurately, and further build the case to support decisions. By analyzing past jobs, finance pros can build in assumptions for current or future similar work based on that history and the current economic environment, e.g., a delay in materials and/or increased inflationary costs. This affords a nuanced combination of both logic and assumption-based planning.
In these financially volatile times, construction companies are becoming more aware of where they are spending their money and evaluating that against growth opportunities for their business. In the past, organizations may have just bid on jobs they had the relevant capabilities to do. Now, they are taking a step back to try and determine if they should buckle down instead of pursuing new business.
With FP&A tools, finance executives can make better informed decisions by understanding how a potential job may impact the organization more broadly—how it would affect the company’s debt levels, how it would be financed, how it would be staffed, what was the P&L impact of a similar previous job, etc. With this knowledge, in many current cases, finance leaders are guiding their businesses to pay down their debt rather than invest in new ventures. This may amount to a productivity slowdown but will position the organization to better weather the economic storm.
At the present time, construction businesses need to be keenly focused on the impact of their debt and overall cash flow—which falls squarely on finance executives’ shoulders. With the right tools, finance leaders can create multiple scenarios and conduct real-time adjustments and analysis to best understand the overall financial impacts. These insights will empower them to advise their organizations on the best courses of action to help them emerge successfully from the current economic environment.
About the Author:
Daniel Fellows serves as solution marketing manager, construction & real estate, for Prophix, a global leader in mid-market CPM software. In his role, he works tirelessly to refine Prophix’s industry-leading construction solution–which provides contractors with intelligent and timely analysis of their jobs with interactive reporting and real-time dashboards–to meet contractors’ needs. Daniel started at Prophix in 2017 and previously held roles in consulting and solution design. In 2020, he was one of the founding members of Prophix’s Construction Essentials offering, which has since been widely adopted across the construction industry. For more, visit www.prophix.com.
Modern Contractor Solutions, January 2023
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