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Nine golden rules to keep ahead of the downturn

Financial consultants Smith & Williamson have issued the construction industry with 9 'golden rules' to prevent going bust during the economic slowdown.

Smith & Williamson ask why so many construction firms go bust. Their head of Retail Advisory and Restructuring, Barry Knight, shares his nine golden rules for keeping a construction business in business.

1. "Produce regular forecasts. These should be at least quarterly, and preferably monthly, with cash flow being the most important. Run sensitivity analysis to compare cash position and bank facilities. Make sure that items of capital expenditure are identified well in advance. If you have undrawn bank facilities consider drawing down and placing cash on deposit with an alternative bank. Remember, cash is king and you only go bust when you run out of money!"

2. "Move your cost base away from fixed to variable even if at the outset it appears to cost more. If the business is facing a downturn and a possible fall in demand, there is likely to be excess capacity and those costs which are variable will naturally fall."

3. "Ensure bonding facilities are committed and meet regulatory requirements. Stress test 'default clauses'."

4. "Set realistic banking covenants. These should reflect the true risk of the business and should not simply be intended to achieve the cheapest cost of borrowing. Anyone who breaches banking covenants rapidly loses the confidence of their banker."

5. "Manage stock. Don’t hold on to old stock. Old stock ties up working capital, so if it isn't selling, discount the price and get rid of it. If stock doesn't sell this year, it's unlikely to sell next."

6. "Check out the competition. Keep a watchful eye on competitors and if you are doing something different (including buying), make sure that you are right and they are wrong. Adjust your business model when required. (It is very unlikely that a small business can compete on price. It needs to differentiate on other aspects)."

7. "Be flexible and think ahead. Consider changing customer trends and clients' needs and aim to adapt accordingly."

8. "Stay alert and be realistic. If you realise there is a problem, act on it and work out a solution that can be presented to creditors. Don’t just assume you can trade your way out of problems, more remedial action may be required. Recognise that banks, in particular, don’t like shocks."

9. "Ensure you are adopting best practice. How good is your website? (Ease of use, comprehensive information)."

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