John Betteridge is director of restructuring and advisory at Naismiths
On 15 February 2024, the UK officially fell into a recession following a prolonged cost-of-living crisis. With the inflation rate at 4 per cent and interest rates spiking, it is an economic storm buffeting all sectors.
“During a recession, the temptation can be to not invest further in your business and to instead sit tight doing what you have always done”
Inflation should be accounted for when projects are being quoted, but the record highs of recent years could never have been predicted. Higher inflation leads to higher costs and lower margins. While it is starting to stabilise, we are really in the thick of it and it is make or break time for many businesses. According to Begbies Traynor, nearly 8,000 construction firms were on the brink of collapse at the start of the year.
While this will undoubtably impact nearly every business to some degree, in my experience there is a lack of knowledge about the solutions available to prevent SMEs from transforming their business trajectory before it’s too late.
Small but mighty
Small, family-run organisations are the backbone of our economy, and there are so many exceptional businesses that know the construction market inside out. However, there are two problems we encounter when said businesses get into financial hardship; one being a lack of knowledge of the support available and two, there can be a reluctance to seek help, often for financial reasons. Where there has been generational leadership in a business, it can be hard to seek external support due to the emotional connection to the business and stigma of perceived failure.
In addition, we are seeing the strain on these businesses as they often do not have robust debt recovery plans in place to chase the money they are owed from clients. The industry is notoriously poor at paying promptly and this leads to a cashflow squeeze, which once again affects the little guys the most. While relationships are essential in this sector, and repeat work is how many deals are done, scrutinising debt and overdrafts is key to future-proofing a business. This can mean taking a professional yet firm approach when asking for monies owed rather than simply trusting that those industry connections will come good.
Overall, if the SMEs are not getting paid, they will not have the cashflow to complete the job and the client will not have the job delivered – it is a cyclical pattern. Being as efficient as possible is, therefore, mutually beneficial to everyone.
Reflect, adapt, repeat
During a recession, the temptation can be to not invest further in your business and to instead sit tight doing what you have always done. However, every business, particularly SMEs, must follow a simple process – reflect, adapt and repeat. Improvement can only come through change, and a business can see where ineffectiveness is letting it down by conducting a full business review and reflecting on all aspects of the organisation, from winning the work through to final accounts. Being proactive in not only being reflective but critical of weaknesses means a business can make improvements, become more efficient and have the foundations to scale once the market conditions allow.
Furthermore, if a business can integrate the practice of monitoring processes versus performance at every stage, over time incremental improvements can be made and positively impact future work opportunities. Clients will trust in your robust systems and ability to cost a project effectively – meaning no surprises for any stakeholder down the line.
Breaking down barriers
Establishing an SME in the construction industry is hard – cost, health and safety legislation, and market viability are just a few reasons we are not seeing more new businesses enter the sector. This means we need to protect SMEs and not lose the skills they have when there is already a skills shortage. This is coupled with the essential need for a thriving sector to support the wider economy, as proven by the recent ONS statistics showcasing an output surge for construction of 1.1 per cent against 0.2 per cent in the overall economy.
Implementing monitoring processes could mean the difference between success and failure for SMEs in this market. Left too long, the choices become more limited and sometimes the only option is insolvency.
