The Danger of Good News

By June 1, 2020 News

In business it’s as important to prepare for success as well as for failure.

There has been a lot written about the struggles that UK businesses face in coping with coronavirus and they are very real. At KDM Group we face all the issues common to the construction industry and we keep our eyes glued to the business pages, national and local government agencies and trusted partners updates to stay up to speed with developments. But looking ahead, it seems less attention has been focused on the challenges of reopening once the lockdown is lifted either in one stage or phased.

It is easy to extrapolate from this plethora of information the health and safety risks of a fast turnaround, especially for construction companies. At KDM we have applied all directive guidelines to operations but if you are coming from a complete shutdown which most construction companies will be it will be hard to apply all the guidelines and expect your operative’s behaviours in the work place to be completely robust from day one of return.

Will you need to practise social distancing on site after lockdown, at least for the initial few week/months? What sort of restrictions will that mean, especially in close working environments will it be as per the current guidance or less? However, in other sectors such as aviation EasyJet is reported to be considering keeping middle seats free for a while when it resumes flights.  So there is a business precedent of adapting to survive which I’m sure construction will flourish in given its track record of reacting and delivering in a fast pace and ever changing environment.

Even this excellent article by Business Insider about the dangers of Covid-19 for businesses doesn’t mention the potential implications for supply chain, finance, and overtrading, etc. of rushing back to full trading so let’s go through some of the key risks:

Communication Is the Key

The key has to be excellent communication between government, business, clients, supply chain and all stakeholders in planning the timing of lifting trading restrictions.

Ideally, business will have advance notice, in order to get preparations in place.

Communicate your plans clearly and be realistic about your capacity. Be explicit about credit terms, delivery and estimated completion times to subcontractors, suppliers and clients. Establish open dialogue with your bank, as far as possible so in short, and I reiterate manage expectations as far as possible.  If you’re good at what you deliver then clients and trusted partners will work with you to get through the early stages of a return to the norm.

Overtrading

Overtrading is a real danger at any time. Simply put, Overtrading takes place when a business accepts work and tries to complete it, but finds that fulfilment requires greater resources (ie cash, people, stock) than are available. It can result in increased borrowing, loss of supplier support, reduced profit margins and can be fatal to a business if it results in trade slumps and you are waiting for payments.

It often affects young businesses, growing quickly, which have not had time to build up sufficient working capital to fund the increase in business. However, an extended lockdown puts many established companies at the same risk. The government is paying staff’s furloughed wages but as customer orders are put on hold, other expenses must be met and capital is depleted through long-term economic inactivity.  Then, if there is no gradually dawning of light at the end of the tunnel, but a sudden announcement by the government that the UK construction sector is open for business again, we are all plunged back into full activity and work to fulfil those back orders. However, financial liabilities such as tax, bank loans, staff wages, business rent and rates, supplier invoices, utilities, etc., which were possibly deferred will kick back in before the revenue stream resumes full flow.  These are classic conditions for overtrading.

Customer Expectations

Alongside this risk sit customer expectations. That burgeoning order book, indicative of a thriving business before lockdown, becomes a burden to be managed carefully as we emerge at the other end. Each customer has been waiting since at least before lockdown started, and some even longer. Each one now expects to be first on your list so if you cannot fulfil the order maybe they will consider going to a competitor. Losing these orders might mean returning customer deposits, you could offer discounts to retain custom but either way means eating into your working capital. The advice is always keep on talking to your clients to manage expectations but its only human nature for a client to want to be your priority once normal service resumes so start to manage expectations as soon as possible.

Plan

Don’t be caught unawares. This is a black swan event: unexpected, unprecedented and with devastating consequences in multiple realms. Much of what has happened took us all by surprise. We can’t predict what will happen next with complete accuracy but we can put plans in place to cope with every likely eventuality, including a resurgence of the virus.

Covid-19 will take its toll on business across the board but those who plan now will stand the best chance of surviving and thriving in the long run.  KDM will hope for the best but plan for the worst which is the best advice we can give to anyone.

Good luck

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