Turnaround of a highly leveraged construction companyConsumer Products
The image of a construction company specializing in oil and gas is very important. Would you want to rely on a construction company whose cheques are bouncing and deadlines are being missed? We judge things often by their appearance, especially when it involves critical projects worth more than seven-digit in value. If you are an excellent company with a poor fund and operation management then you may have loyal clients, for a while, but new clients will be hard to get.
What does work, however, is the ability to present the company as being financially sound and credible. Large customers like the government and major oil producers pay close attention to the financial health of their contractors before awarding projects.
The challenge is to bring a company whose liquidity is very tight. The challenge is to ensure that when a client expects you to deliver on time and you fail due to lack of working capital they feel very negative about your company. The challenge is that most vendors will judge you based on your ability to pay for past purchases punctually, and if your cheque bounces you have nobody to finance your future purchases. Each and every part of the organization suffers when your bank account drains out due to poor financial management. The client needed to:
- Improve sales and operations and production planning:
The teams focused their efforts on completing projects in hand to avoid making clients unhappy or facing delay penalties. Little attention was given to generating new projects, implementing cost control measure or improving operations efficiency.
- Determine the right inventory level:
With frequent requirement for materials purchase and poor inventory and stock management a huge portion of the client’s working capital was locked in construction materials. The materials were purchased at a higher cost and quantities due to poor ordering system and stolen from the warehouses due to poor security and process control.
- Generate working capital :
The client used up any credit facility it could get and the bank as well as the vendors were starting to consult their lawyers. Workers refused to show up for work as they have to wait for up to four months to get paid. Clients refuse to release payments due to missed milestones.
The company needed some room to breath before the next creditors knocks their door. The first building block was to stop everything the management did wrong thus far. Each and every part of the organization has to be enlightened about the real situation and engaged in the turnaround process. The corrective measures recommended by First Capital mainly included:
- Improve sales and operations and production planning:
Given the nature of the business and the fact that there were a few contractors in the oil and gas sector in the area the company’s promoter comes from, there was absolutely no effort to book new business or diversify into new sectors and offer new service. An experienced business development person was hired with only one goal; sign new contracts. Other operational loops and loose ends have been fixed to prevent losses of all forms.
- Develop new relations with fresh vendors:
Materials purchase has to be based on systematic approach and cost of ordering, holding and reordering materials have all been optimized. To avoid dealing with the old upset unpaid vendors a new list of vendors have been suggested.
- Solve the cash issue:
The critical path was to convince the bank to lend a little more money to recover larger debts previously granted. This strategy succeeded as banks are less resistant when lending to an existing client who has gone insolvent than to lending a fresh borrower who seems credit worthy. The bank agreed to fund working capital requirements for a short period of time. Workers and staff were paid in full. Vendors and other creditors started to receive small portions of their dues which held them from going to court.
The business went through 18 months of tight cash position and, in due course, suffered many collateral damages. Fortunately, the remedy prescribed by First Capital did not take long to kick off. The following achievements were recorded three months after submitting our recommendation to the management:
- Improve sales and operations and production planning:
The business development executive suggested the supply and trading of some commercial items and secured two new projects that kept hope alive for everybody. Operations and production cost declined due to the new measures and that affected profit margin.
- Saving big on materials:
Several stores and warehouses were shut down as the business adopted just-in-time strategy for most of its materials purchases. Besides, better negotiations with vendors generated extra savings as the company is no longer insolvent or desperate.
- Optimize Admin, Finance and Operations:
The trauma addressed the importance of good business practice across the company. Better control measures were introduced in every department.
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