"Cash buffers in the bank account are collected in good times, so it’s good to pay attention to the burn and money flow now when things are going well." The construction industry is an important driver to the whole economy. On a sunny Friday in early June, we met Janita Hytönen, an inspiring and energetic CEO of Controllerit, in their office on Castreninkatu, the centre of Helsinki. Janita works closely with CEOs in the construction industry.
The most important areas, Janita is working right now, are the risk scenarios. Together with the CEO, they are assessing the pricing and profitability of the new construction projects if the price of a raw material, such as wood, rises like for example 10% or 15%. “Controllerit focus on the construction industry. We are a partner for the CEO who does not have an in-house controller. Our typical customer is a sub-constructor with a revenue of less than six million euros and they offer, for example, sub-contracting services for the renovation and the demolition of buildings or infrastructure projects.” Janita tells us. “We cover all areas of controlling services, such as the project calculation and pricing, a site post-calculation, or cash and financial planning services.”
How does the construction industry look like today? The seven-year upswing of the construction industry may now be at a turning point.
“Rising raw material prices and labour shortages persist, challenging the industry with the stricter project implementation time, while stricter regulations contribute to a reduced margin for error. Large construction projects were budgeted already years ago, and such a sharp rise in prices could not be foreseen.” Janita explains.
“The special features of the construction industry are large penalties. In practice, this means that for a small construction business owner, one construction site can be financially critical. Therefore, in this situation, it is important that the contracts are planned and priced carefully and that critical issues such as payment terms, safety and schedule are well prepared.” Janita tells us. “For the subcontractor, another special features of the industry today are not only the long payment times, like for example 60 days, but also the late payments, which put the pressure on the money flow right now.” What are you asking CEOs to pay attention to right now?
“At the moment, when there is uncertainty in the air, it’s good that rising fuel and raw material prices are carefully planned in the project calculations. The price clause in the contract is important today.” Janita tells us.
“Cash buffers in the bank account are collected in good times, so it’s good to pay attention to the burn and money flow now when things are going well. The cash and burn is often paid attention to when the CEO closes a big contract or when you are having pressures with money flow, and that’s too late.” Janita explains
“Also it's good to pay attention to the payment schedule and the payment terms. Late payments are getting longer, so the advance payment as a payment term can minimise your risk. When you're closing a deal with a new customer, check the payment terms and risk profiles at riskrate.”
“Using Excel, it's possible plan the big picture about your business and cash, but excel won’t work on a daily cash prediction. So I use automation and fortunately I can get the superior 90-day daily cash predictions for future events using integration. riskrate tells the cash risk using confidence interval and the customer's payment times to the others based on real-time data.”
What are the three most important financial KPIs for you as a Controller and why?
“The KPIs depend a lot on the situation of the company. If the wrong things are followed, the KPI is not useful.” Janita says.
“Due to the special situation of the construction industry right now, it is important to the CEO to monitor whether the company's cash flow is positive, i.e. whether the business is profitable. Secondly, it is important to monitor liquidity, i.e. which projects are in progress and when the money will flow in. The solvency ratio is important if a company has loans, because of the current inflation pressures and higher rates. The operating profit tells the profitability and competitiveness, it is worth comparing with the industry benchmarks.”
There has been a lot of talk about stagflation recently: what concrete advice you are giving to the CEO who would like to keep money flow in control during the turbulence?
"Especially now, when we are in between the economic cycles, I have emphasised that if the CEO has no time for the numbers and money flow, the controller service will save time." Janita tells us Janita's TOP 5 Tips to the CEO of the construction industry:
1. Plan contract milestones according to the supplier payments and project costs.
2. If the project is no longer profitable, dare to refuse the contract even if the revenue fall.
3. Negotiate a cash limit with your bank: it protects against daily cash fluctuations.
4. Pay attention to the cash now, because the cash buffers are collected in good times.
5. If you do not know what to do or do not have time to do, ask for help.
Right now, CEOs of the construction industry have been forced to make difficult decisions around resource allocation and cash flow planning. At the same time, the role of Janita and the other Controllers have become highly strategic.
Contact Janita if you need an experienced Controller as a strategic partner. The environment is changing rapidly right now. If you need to make better decisions faster, we’d love to serve you - fast.
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