Ongoing inflation and a looming recession remain of high concern to finance leaders at organizations. Recent research from the CNBC CFO Council found the majority (57%) of CFOs surveyed said they do not think inflation has peaked, and more than a quarter said inflation is the biggest external risk factor facing their businesses. Also, nearly half (48%) said they expect a recession in the first half of 2023.
These factors are putting a significant strain on CFOs when it comes to accurately planning, budgeting, and forecasting. And finance leaders at construction businesses – which must navigate volatility even in the most favorable macroeconomic conditions – are feeling this pressure even more intensely than many other industries.
Challenges in Construction
In addition to labor shortages, rising material costs, and ongoing supply chain difficulties, many construction companies are currently experiencing persistent cash flow problems in a sector where cash is king. Additionally, if CFOs' projections of a recession come to pass, construction companies’ funding sources and revenues may soon experience net negative cash flows.
Additionally, a construction boom was sparked by historically low financing rates during COVID. Now, construction companies are paying more on the debt they accrued as the Fed boosts interest rates in an effort to rein in inflation. Construction finance executives who struggle to accurately assess these elements in the context of a larger financial picture and who were unable to foresee these difficulties through "what if" scenario planning may have to deal with stalled projects and negative balance sheets.
Flexibility in Planning and Forecasting is Required
To better predict a financial picture for their organizations in the year ahead, finance executives must create detailed plans that take into account numerous situations to best position their companies and boost productivity during these times of uncertainty and limited cash flow.
Spreadsheet-based financial planning remains the norm in too many construction organizations today. However, planning with spreadsheets or "pen and paper" does not allow for the level of flexibility needed in today’s economic climate. Instead, what’s required is the capacity to project and quickly generate "what-if" assumptions.
Finance executives must consider future situations that reflect a variety of circumstances. Without this kind of scenario planning, their businesses won't be able to quickly and efficiently pivot when needed. However, with the correct tools, finance leaders can effectively plan for a variety of potential outcomes and actively steer their businesses to remain profitable.
Cloud-based, Automated FP&A Tools
Construction finance executives can turn to cloud-based financial planning and analysis (FP&A) tools to help prepare for success despite continuing inflation and a potential recession. These solutions offer the flexibility required for finance leaders to adapt and make quick decisions depending on unexpected or predicted changes in the economy. They can also more effectively factor in variables, such as an inflation-related 10% rise in the cost of goods, and plan accordingly.
Additionally, these FP&A tools enable finance leaders to more correctly estimate future outcomes and strengthen the argument for their choices by allowing them to reflect on the success of past actions. Finance professionals might incorporate assumptions for current or future work that is similar to past work based on that history and the current economic environment, such as a delay in the delivery of goods and/or higher inflationary costs. This allows for a subtle blending of logic and planning based on assumptions.
Outlook for Construction Businesses
Construction companies are paying more attention to their spending in these uncertain economic times and weighing it against potential company expansion opportunities. By understanding how a possible job may influence the business more broadly -- how it would affect the company's debt levels, how it would be financed, how it would be staffed, what was the P&L impact of a previous similar job, etc. -- finance executives can make better-informed decisions, thanks to the use of automated FP&A solutions.
About the Author: Daniel Fellows, Solution Manager of Prophix, is a member of the Construction & Real Estate team with Prophix, a global leader in mid-market CPM software.