Construction sector needs solid financial foundations

Driven by strained supply chains, Scotland’s construction industry continues to face a challenging trading environment.

Key materials including timber and cement are in short supply, with prices rising accordingly.

Various labour shortages, including the well-documented dearth of HGV drivers in the UK, are also impacting the sector.

Some of these factors are unique to the UK – and indeed some predate the pandemic, such as the driver shortage – but the wider supply chain shock is affecting companies across multiple sectors and internationally.

Businesses are starting to see this as more than just a short-term problem brought on by a surge in demand after the Covid pandemic. Strategies are changing accordingly.

Supply chains that were optimised for efficiency had limited buffers built in when something unexpected came along.

Companies are now looking closely at how they can build resilience into the supply chain both for learning to live with the current situation and in preparation for the next challenge.

What will the next shock be? Is the industry prepared for a sudden shortage of steel or aluminium, or the impact of sustained high energy prices on input costs?

Strong demands in areas such as infrastructure and residential property are creating challenges and opportunities.

Clearly for some businesses that are still able to fulfil this demand, either through supply chain resilience or otherwise, there are opportunities for further investment in capacity as material shortages and price rises are forecast by some industry bodies to be with us for the medium term.

Scarcity and the price of materials may also accelerate wider change, for example by accelerating the adoption of new ways of working or materials.

In other sectors, we have seen difficult trading conditions lead to more co-operation and collaboration.

This starts with the basic step of investing more time in building strong supplier and contractor relations, and working closely with suppliers during difficult trading periods.

In the short-term, robust management of working capital is essential to allow businesses to forecast any challenges well in advance.

Those that are well prepared can produce accurate cashflow information that allows them to react quickly to change.

Cashflow information should be combined with an awareness of all the funding options and working capital tools available to the business, from the traditional to the less conventional.

Firms should not give in to the temptation of going quickly after the cheapest funding offer.

Instead, they should take time to consider a solution that aligns most appropriately to their business needs.

Ultimately, rising and volatile prices and material shortages may become the new normal for Scotland’s construction sector.

For some, this means a growing order book, increased demand and pressure to catch up with a backlog of work.

While the demand creates opportunities, there are also risks of overtrading and suffering working capital shortfalls and liquidity problems on top of supply chain issues.

Getting the right systems in place will help deliver the right financial information whenever firms need to react appropriately and mitigate risks in a challenging trading environment.

TOOLS FOR THE JOB: Scotland’s construction businesses need the right systems in place to help deliver the appropriate financial information.