How UK Housebuilders are solving their 3 toughest financial challenges in 2016
Large players in the UK housebuilding sector are facing serious financial difficulties, with the bankruptcies of several major names in the last 12 months forcing financial directors to carefully consider their cash positions.
Three major shifts in the construction industry are driving this level of financial uncertainty.
1. Rising Costs: both labour and materials costs are rising due to unmet demand in the UK housing market. Given the low margins for housebuilders, minute fluctuations in labour or material costs can quickly send housebuilders into the red. Meeting the committed margin targets becomes a real struggle when working towards an agreed price set before the increase in cost.
2. Skills Shortage: The UK is facing an unprecedented skills shortage in the wider construction industry. Wages for skilled workers are rising, making sub-contractors more demanding and less likely to accept late payments. They’ve got more say in the jobs that they pick, meaning that they select the jobs that come with lower travel time and where they know they’re going to get paid the best rates and paid on time.
What makes matters worse is that when having to replace a demanding sub-contractor that left for a competitor, your new sub-contractor may want to start from scratch rather than use existing work done by the previous sub-contractor, further adding to the cost of the project. This is a real challenge particularly in the mechanical & electrical contractors space.
3. Work vs. Cash Flow: As contractors and sub-contractors seek to grow their businesses, they take on more work. But taking on too much work means having to pay for the materials to carry out that work. As payment is received after the work has been completed, an obvious cash flow problem becomes apparent. Taking on too much work without having the cash to support the cost puts contractors and sub-contractors at serious risk. Some major contractors have gone bankrupt this past year for this very reason.
Solutions for Housebuilders in 2016
Housebuilders may not always have a lot of leverage to be able to affect the price of the labour or materials they procure, but using technology to automate repetitive tasks is an area that can provide large savings.
Some companies are saving 80% on their accounts payable costs*. For some businesses, this equates to savings of between 1 and 2% of turnover. These savings can be made through implementing electronic invoicing with trading partners.
House builders deal with hundreds if not thousands of sub-contractors to carry out work, resulting in a very significant number of invoices and other trading documents needing to be processed.
It isn't unusual for an average-sized house builder to receive in excess of 300,000 invoices per year. Switching to electronic invoicing would save more than £8million in the first three years*. Streamlining invoice processing has a large number of benefits beyond the large cost savings, take a look at my recent LinkedIn Post.
Selecting an e-Invoicing platform
1. In order to reap the full benefits from this type of technology, the solution should be easily adoptable by suppliers, no matter their size or IT maturity, through flexible connection options. Make sure that the solution you choose has a selection of connection options for your suppliers.
2. The platform you choose should already contain a large proportion of your suppliers for easy adoption.
3. The software should easily connect to your own finance system, allowing you to build in automated validation and streamlining your entire invoicing process.
4. The software provider should have a proven track record in your industry. Each sector in the construciton Industry has its own invoicing particularities. Housebuilders typically have major requirements for rental agreements with plant hire companies who in themselves have a variety of different ways to define, track and charge for 'on' and 'off-hire' periods. Selecting a provider that has worked to solve these issues in the past will be much easier to deal with.
5. For housebuilders, having healthy working capital allows them to purchase more packets of land, enabling them to compete and grow. A supply chain finance offering within an e-Invoicing platform allows house builders to benefit from more favourable payment terms, which in turn provides to working capital required to grow.
The Tradex e-Invoicing platform hosts the largest business trading community in the UK construction sector, with more than 35,000 companies trading 5.5 million electronic documents per year. A significant proportion of a house builder's trading partners are probably already on the platform, making supplier onboarding that much easier.
*Electronic invoicing statistics are taken from the 2015 Billentis eInvoicing Report