Read time: 4 mins      Date Added: 22/11/2023

Scotland’s construction sector contributes £8.5bn in Scottish Gross Value Added and supports more than 170,000 full-time jobs. There are also 60,000 self-employed construction workers and 10,000 construction apprentices across the country. 

The importance of safeguarding cash flow to unlock new growth opportunities

The construction industry has however faced significant challenges in recent years with labour shortages, supply chain disruption and rising inflation, which has inevitably led to impacts on profits and cash flow. 

But challenges often bring opportunities, The Federation of Master Builders (PDF, 893 KB) predicts that construction output will return to pre-Covid levels by 2025. And that sustainability measures, such as retrofitting, will help drive future resilience. 

Bank of Scotland’s Invoice Finance team recently brought together a group of stakeholders and experts from across the accounting, legal services and financial advisory worlds to explore the risks and rewards experienced by the construction sector and what support is available to deliver on new growth opportunities. Here, we share key insights from the session that took place. 

Invoice Finance

The construction industry is different from many other sectors in the way it does business. For example, it’s not unusual for businesses to operate with low profit margins, which have been made worse by recent headwinds.  

This means that firms need to be more cautious with their finances and seek the support to continuously improve their payment cycles.  

Invoice Finance is one option particularly relevant to the construction sector. Our Invoice Finance solutions, provided by Lloyds Bank, give early access to the funds owed in unpaid invoices as well as applications for payment and payment certificates. That means that while waiting for customer payment, businesses can benefit from a cash advance to strengthen cash flow and support growth ambitions. 

Invoice Finance not only provides tailored facilities to suit the needs of a business but also offer dedicated teams to guide throughout the entire process. 

Risk vs reward

Implementing a product like Invoice Finance can help to optimise cash flow, though it’s also essential to consider external factors and world events that are uncontrollable. Scenario planning can help business leaders better understand the challenges facing their industry and get into position to cope with future issues. 

During the session held in Edinburgh, Mark Toulmin, Managing Director of The CI Group, addressed the audience on how debtor protection works alongside Invoice Finance to help SMEs mitigate against the risks arising from debtor insolvency and protracted default.

Mark explained: “Businesses in the construction industry often have high turnover but small margins. Making sure you have a healthy cash flow and plans in place for future disruption can help make a business more resilient and ready to mitigate future challenges. 

“A company’s debtor book is often one of its largest assets. Experiencing a significant bad debt can hinder a firm’s cash flow, sometimes leading to catastrophic consequences. By taking steps to ensure your company is protected against the risk arising from debtor insolvency and protracted default, you are protecting yourself against future failings in the industry and safeguarding your company’s financial resilience.”

Paper is king

Two thirds of people admit to not reading contracts properly. Recent research revealed that poorly or unfairly written contracts can result in project costs soaring by 20%, significantly impacting efficiency and profitability. 

Chris Duffill, Managing Director at Gateley Vinden, discussed the opportunities the Scottish construction industry has to thrive but warns of the pitfalls associated with not fully understanding contracts.   

Chris explained: “Sometimes I think the size and impact of the construction sector in Scotland is overlooked. We have a host of well-established firms and emerging companies ready to bolster the sector. But we need to be careful. 

“We’ve all heard the expression ‘cash is king’ but in the construction industry, it’s paper that rules. It’s been a turbulent time for the sector but firms need to ensure they have robust paper trails in place and that they read contracts carefully. If you focus purely on the profits and not the fine print, you run the risk of agreeing to terms that aren’t as flexible as you need in what is an uncertain environment.

“The good news is that long-term growth rates of the industry in Scotland are on par with the rest of the UK, and I’m confident that businesses who want the opportunity to grow, can. The need to retrofit buildings across the country is also presenting the opportunity to create a new workforce, giving firms the chance to look beyond traditional projects and focus on how sustainability can be a driver for growth.”

Supporting Scotland’s future

At Bank of Scotland, we understand the pressures put on businesses caused by delayed or unpaid bills, and the impact this can have on cash flow.   

Jamie Kemp, Director of Invoice Finance for Scotland, the North East and Yorkshire at Bank of Scotland, said: “Businesses should place greater importance on having an effective working capital management strategy. Having a healthy cash balance allows a firm to enhance their operations and grow with the confidence that they have sufficient cash reserves to deal with any surprises. 

“Our Invoice Finance specialists analyse the cash conversion cycles of our clients’ businesses, benchmark them against their peers and identify the impact these opportunities and challenges can have on a firm’s cash flow position. 

“Discussions like these are essential if we want to continue supporting the construction industry as it builds back. By improving cash flow and reducing potential risk posed by market uncertainty or processes, we’ll continue to support Scotland’s construction sector.”  

We remain committed to supporting the Scottish business community, so keep an eye out for future events where we’ll be providing timely guidance and sector insight. 

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Invoice Finance facilities may be provided by one or more of Lloyds Bank Commercial Finance Limited, Lloyds Bank plc and Bank of Scotland plc. 

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