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Weathering The Storm

Paddy O’Connell, Director, RSM, sets out some of the issues management should be considering to chart a sustainable path for their businesses as the industry emerges from the Covid-19 shutdown.

 

In recent months Covid-19 has impacted not only on society but also on business activity in all sectors. The construction industry has not been immune to the effects of the pandemic.

Significant work has been undertaken by the industry in dealing with the immediate impact of Covid-19 on how it operates, with sites closing, staff layoffs, restricted movement during the lockdown period and preparations to return to work safely.

The focus has been on business continuity and crisis management.

Maintain Focus

However, business owners must maintain a strategic focus on their business as the impact of Covid-19 will extend well beyond the period of restricted activity. The economic forecasts are extremely negative, and there is no doubt that Irish and global economies are facing into a potentially protracted period of recession. The depth and duration of the downturn remain to be seen. Consequently, business owners and management must revisit their medium- and long-term strategies, and dedicated time must be set aside by business owners, senior management and boards of directors to achieve this.

A business will have a strategic vision, the cornerstone that the business is built on. A well-conceived strategic vision establishes the business’s long-term direction. It may be the case that the current strategy remains valid but will be challenged during the coming period.

Business Objectives

Challenging objectives will have been set, converting the strategic vision to performance targets against which progress can be measured. The performance targets will stretch staff and management to improve a business’s financial performance and business position. Given the exceptional circumstances that we are now facing, previously established objectives will need to be revised. These objectives will be a combination of financial (eg, revenue targets, return on investment, cashflow) and strategic objectives (eg, market share, outperforming the market, identifying growth opportunities, leading the way in with innovation and use of technology). The desired performance and revised objectives should ensure the business is more intentional and focused on its actions.

While the business will have established planned strategies to achieve its objectives, these will need to be adapted to react to the exceptional challenges now being faced. This step should be considered in the context of the business’s situation and prospects. An honest diagnosis of the company’s internal and external situation is required.

An assessment of how resources are deployed should be undertaken. Are staff being committed to productive tasks that support the achievement of medium- and long-term objectives? During a period of crisis, there is a risk that businesses will eliminate costs or resources that are non-essential for the short term but essential for the long term and damaging responses to the inevitable downturn. It is, however, inevitable that employee and wage decisions will be made.

Working Capital

Robust and efficient management of working capital is required to lay a solid foundation for the delivery of a revised business strategy. From an early stage in the Covid-19 response, most companies will have looked at their cost base and made adjustments where necessary. The next step is to consider and manage the timing of receipts and payments (along with external funding if required) to ensure your company has the necessary cash and capital to trade.

In an established business with long-standing supplier relationships, cashflows can be easy to predict. The current climate has caused previously reliable payment terms to be a source of financial uncertainty, absorbing key management time. The ability to create efficient and robust management of working capital can be the foundation for supporting a company’s Covid-19 response.

This management could involve:

  • Engagement with suppliers and stakeholders – there is an element of “we are in this together”, and there needs to be openness in dealing with your supply chain and confidence that payment and commitments will be honoured.
  • Agreeing on cash milestones throughout contracts, including upfront retainers or payments on account – clients will need to understand that cashflow is required to progress projects. Slippage in the timing of payments may raise more serious questions.
  • Engaging with banks to understand the level of forbearance available, the continuing availability of facilities and additional lines of funding – the development of cashflow projections taking account of the new reality.
  • Driving efficiency on projects that will pay – maximise profitability on those contracts and not chasing work to the point that margin is compromised just to stay busy.

Projections prepared for the current year will be required to be revisited and likely restated, as will high-level projections for subsequent periods. The underlying assumptions and robustness of those projections should be stress-tested. Weakness in projections will affect the credibility of representations to stakeholders.

Adapt To Survive

Adapting your strategies now will allow the business to chart a path through the inevitable recession. Companies that plan and adjust their strategies have a better prospect of survival. The viability of the business may come into question, and there will be fallout within the construction sector. Revised strategies may require a material re-organisation of the business, with tough decisions being made.

The job of implementing and executing strategy will be hands-on. It will involve reshaping the business, setting budgets, allocating resources, motivating your team towards achieving objectives, ensuring the internal support is fit for purpose, building a culture that is capable of achieving strategic objectives and, above all, showing leadership to drive implementation and challenging the business to improve continually.

Constant Evaluation

Constant evaluation of implemented strategies will be required, as changing external conditions impact. Management needs to stay close to the situation to detect when any further response is required. The availability of timely, complete and accurate financial information will aid decision-making during this critical period.

In Conclusion

There is an expectation that stimulus packages will be introduced to reinvigorate economies and to kick-start business activity. As Covid-19 has impacted the entire economy, there will be significant competition from all sectors and their representative bodies for funding, and it will likely take some time before the benefits of a stimulus package for the economy and individual businesses to come to fruition. The challenges brought on by Covid-19 will be with us for an extended period. Companies need to commit to revisiting their business strategies, with key week by week steps, to ensure they can weather the storm and emerge from this challenging period as a stronger, more resilient business.

Paddy O’Connell is a director in RSM’s Transaction Advisory Services Department with over 20 years of experience in managing profile construction and property development assignments. To learn more about RSM, visit www.rsm.global/ireland

 

Six Tips To Sustain Your Business Through Challenging Market Conditions

1. Previously established objectives will need to be revised to ensure your business is more intentional and focused on its actions.

2. Business objectives should be adapted to react to the exceptional challenges now being faced with an honest diagnosis of your company’s internal and external situation.

3. A realistic assessment of how resources are deployed should be undertaken.

4. Robust management of working capital is required to lay a solid foundation for the delivery of any revised business strategy.

5. Adapt your strategies now to enable your business to chart a path through the inevitable recession.

6. Evaluate implemented strategies regularly against the impact of changing external conditions.