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Making a Profit in Construction

Deconstructing construction finance to build stronger contractors.

Allon Raiz

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South Africa is readying itself for an infrastructure development boom. On 24 October 2012 the Business Day newspaper reported that at an infrastructure investment conference in Johannesburg, President Zuma had announced that the government was drafting legislation to enable infrastructure development, as well as trying to find funding methods for 18 strategic infrastructure projects.

These projects are estimated to be worth R4 trillion over 15 years.

The huge prospects for companies at all levels of the construction industry that this represents are clear. But whenever huge opportunities like these present themselves to business, they bring with them several dangers.

There are some common mistakes to be avoided by small construction firms when pursuing big projects.

Single project focus

Firstly, many small construction companies spend all their time and energy on bidding for and servicing large projects. This is understandable – on paper the figures attached to these projects look extremely tempting.

However, this single focus leads companies to becoming simply project-based operations, making them highly susceptible to a feast-or-famine situation. When their single big project is finished, many such companies do not have a pool of smaller projects that will sustain them until the next big opportunity arrives.

The single project focus must be avoided by dedicating time to look for new opportunities continually, even when at work on a large project.

Lack of diversity in offerings

A report published in August 2011 by two members of the University of Cape Town’s Department of Construction Economics and Management, Dr Abimbola Windapo and Prof Keith Cattell, indicates that “the ability of a company to grow, improve turnover and gain greater market share is linked to its ability to diversify its services and products.”

Most of the successful companies that were surveyed were “active in at least three types of product/service markets – most commonly in civil engineering contracting, general building contracting, property development and housing development.”

In other words, to ensure the sustainability of their operation, a construction firm should focus not only on having a number of projects at hand, but also on diversifying the range of products and services they offer.

Unclear profitability

Often the profits attached to these projects are not as high as the contractors expected them to be. This is due to a number of factors, chief among which is a lack of experience and understanding in project costing. This leads to the expected profits gradually being eaten away by unplanned-for expenses. The net effect is that profits on big projects are often nominal, if not ultimately negative.

The lower than expected profits are a major cause for concern in the industry. A 2011 report on financial support options published by the Construction Industry Development Board (cidb) states that, between 2007 and 2009, the reason that more than 1 400 construction enterprises failed is “the current lack of profitability in contracting: a measurement of profitability established within the industry has indicated a continual decrease in this regard over the long term.”

Overextending working capital

This is a catch-22 situation that many construction companies find themselves in when they are handling projects. To increase their turnover and improve their cidb ratings, thereby making themselves eligible to bid for even larger projects, these companies overextend themselves in the projects that they take on.

Having taken on projects too big for their own resources to cope with, they find themselves both without the working capital they need to continue with the project, as well as continually having to subcontract various aspects of their projects to other companies – which reduces profits even further.

The lack of working capital and access to finance is a major constraint on contractors at all levels of the industry. In their report, Windapo and Cattell found that the leaders of the successful firms interviewed were unanimous in “acknowledging that the specific strategy responsible for their company’s development, growth and success, was their decision to develop a strong financial base for the company.”

Developing a strong financial base – which is often described as a company having cash reserves of between one and a half and two times its monthly turnover – is not an easy feat, particularly given the low profit margins in the industry. It is made even more of a challenge in the South African context by the extreme delays in payment that are often encountered when projects are undertaken for public sector clients.

Financing mechanisms

To build a strong construction sector, the development of financing mechanisms that take into account the specific needs of upwardly migrating contractors must be promoted. In its 2011 report on financial modelling options, the cidb found that there are “limited options available from banks or other lending institutions to cover [contractors’] large working capital requirements, especially in the absence of sufficient collateral.

The various banks in South Africa have developed and implemented a project finance model but it has not been implemented successfully.”

An aspect of financing that may assist lenders to overcome their reluctance, and which is described as “not fully understood, recognised and exploited” and “a missed opportunity for many companies” in the same cidb publication, is enterprise development.

Enterprise development in the construction sector

Enterprise development programmes offer an opportunity for emerging black-owned construction firms to build their capacity, which will enable them to bid for larger projects, as well as improve their profitability.

The cidb report on financial modelling options lists several benefits of enterprise development programmes for emerging black-owned firms, including recognition by both banks and large construction companies for sub-contracting purposes.

Furthermore, enterprise development is a focused intervention designed to grow emerging businesses with measurable results, which encourages large corporations to support these programmes for the various rating credits they can obtain.

Case study

The impact that an appropriate enterprise development programme can have on an emerging construction firm is dramatic. Among several construction firms in Raizcorp’s ARIZE comprehensive enterprise development programme is Turnkey Group, owned by Khomotso Choma.

Prior to the recession, Ms Choma built Turnkey Group into a recognised name in construction, with a turnover of about R21 million. But then the recession hit. The company struggled to get paid for the work they had done, their suppliers were demanding payment and threatening legal action and a severe cash-flow crisis was looming. Turnover spiralled down to R7 million and the company faced a bleak future.

At that juncture, Ms Choma applied to join the ARIZE comprehensive enterprise development programme run at the BECSA Business Support Centre in eMalahleni. The learning and guidance provided by the programme enabled Turnkey Group rapidly to implement the processes and structures required to turn the company around.

Moreover, the company was able to create a strong platform for future growth in terms of capacity for new work and job creation.

Within a year of Turnkey Group being accepted into the programme, the company’s turnover grew by 114% and they won the Govan Mbeki Housing Award for the Best Informal Settlement Project of the Year 2012.

Conclusion

The cidb’s Business Conditions Survey for the third quarter of 2012 reflects none of the optimism that one would expect in light of the President’s announcement at the infrastructure investment conference. It states that; “Respondents are generally pessimistic about current and expected business conditions, building activity and employment levels are low and profitability is under pressure.” The reason generally given is “inadequate access to credit.”

The imminent infrastructure boom and the opening that this presents for contractors to diversify their offerings, as well as the possibility of using enterprise development programmes to increase capacity and develop business skills, present great opportunity for contractors to lay firm foundations for their companies’ future growth with an entrepreneurial approach.

Allon Raiz is the CEO of Raizcorp, the only privately-owned small business ‘prosperator’ in Allon Raiz is the CEO of Raizcorp. In 2008, Raiz was selected as a Young Global Leader by the World Economic Forum, and in 2011 he was appointed for the first time as a member of the Global Agenda Council on Fostering Entrepreneurship. Following a series of entrepreneurship master classes delivered at Oxford University in April 2014, Raiz has been recognised as the Entrepreneur-in-Residence at the University of Oxford’s Saïd Business School. Follow Allon on Twitter.

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Business Landscape

5 Thoughts To Give You The Courage To Make Change

The only constant is change. If you can’t learn to embrace it, you’ll be left behind.

Allon Raiz

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In my experience, change is harder for those who perceive themselves to be succeeding than those who perceive themselves to be failing. Failure produces an irresistible motivation to reflect and to seek changes that will eliminate the pain you are feeling. It is those who perceive themselves to be successful who are most likely to stick to the status quo in a sea of change.

Change always happens: Contexts change, markets change, competitors change and so on. So, reinforcing a strategy and recipe for success seems the logical thing to do, right? If it ain’t broke, don’t fix it, goes the mantra. Why on earth would you mess with a winning formula?

The problem is that these winds of change are numerous and subtle, moving slowly and in different directions, making them invisible to the ‘successful’ eye. Business books are filled with case studies like Kodak who, despite acknowledging the threat of digital, were so entrenched in their current thinking that they sailed their ship right off the end of their flat earth.

Related: Successful SA Entreps Share Their Most Valuable Business Advice Ever Received

Here are five thoughts to provoke you and guide you in finding the courage to change.

1. This too will pass

Live by the law of impermanence that says that nothing remains permanent; neither failure nor success. This should create a level of healthy paranoia in successful entrepreneurs that drives them to anticipate what will change and when it will change, and to constantly live in a start-up mindset. Being aware, self-reflective and conscious of your bias is the best remedy for the allure of a permanent reality mindset.

2. Use what you have

One of the most common reasons that we do not want to change is having to admit that the resources we have so painstakingly and expensively built and maintained are not as useful anymore. The now popular and commonly-used terms of ‘radical’ and ‘disruptive’ conjure up scenarios of throwing away everything we have.

In most instances where change is required, the most successful way to change is to use the resources currently available in your business in a reconfigured manner. My rule of thumb is that any new strategic direction should incorporate no more than 20% of new resources, know-how or processes. This approach might not be radical or disruptive, but it ensures that there is a higher appetite for change in the organisation and a higher probability of it succeeding.

Related: Raizcorp: Business ‘Think’ has to come before the Business ‘Plan’

3. Focus on the positive energy change creates

Change is terrifying for many, but it creates a positive energy in a business. We often spend too much time trying to pacify employees who are fearful of change. In my opinion, you should rather be weeding these people out of your business as it grows.

They slow down progress and redirect valuable time and energy from focusing on the future and building towards that. It is important to focus your energy on the positive energy that is being released when change happens, such as excitement, new possibilities, and new growth opportunities for people and the business.

4. Plan your change, but also expect the unplanned

Effective change is ideally planned. Thought-through, documented and communicated phases are always better than a chaotic laissez-faire approach. But as Mike Tyson once said,

“Everybody has a plan until they get punched in the face.”

Life happens, the unexpected is ever-present in our lives, and we need to plan for this. Allowing a 10% to 20% tolerance for the unknown is a wise thing to do to ensure your expectations are catered for. Accepting the potential of random change in your planning will make it easier to accept and manage.

5. Expect Magic

After the dust has settled following a recent change or upheaval, and nerves and emotions have normalised, there will inevitably be an unforeseen positive outcome from the change. When you expect to find this outcome and appreciate the chemistry of time, resources and random events that created it, you will see change as the unavoidable path to these magical events.

It makes going through the change so much more tolerable when you know that when this phase of change is completed, there will be an outcome that will make it worthwhile. This expectation has never failed to deliver for me.

Entrepreneurs do not have the luxury of remaining still and constant, even for a short while. Mighty corporates are also  susceptible to the devastation of the law of impermanence. But, there is a different lens on this that I prefer; every day and every moment brings the gift of change to us which is always a door to a better, more fulfilled future.

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Business Landscape

5 Steps To Cutting The Fraud Of A Cash-Driven Society In Africa

African consumers still prefer cash transactions – here’s how to stop this from impacting on your business bottom line.

Chris Ogden

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There is an issue when it comes to transactions in Africa. That issue is cash. There are plenty of reports that point to the percentage of people who remain unbanked on the continent – it’s high. There are also reports that talk about how those who are banked use their accounts as little more than cash repositories – money in on payday, money out on payday. Why?

The African consumer doesn’t trust the system. They also face significant difficulties in rural areas that have limited card-based services and access to cashless transactions. And bank charges are hefty, eating into their pockets.

Pay attention: Cash is king

Your consumer isn’t banking savvy. They have a bank account because their employer wants to pay via EFT or because a sales rep got them enrolled, but didn’t explain exactly how the banking system could work to their benefit. They don’t trust banks, they don’t like the transaction fees and cash remains the currency of choice. In this world, cash is king. For the entrepreneur this cash-based society has both challenges and opportunities.

Related: Strong Company Culture Fattens The Bottom Line

The challenge: Cash is easy to lose

If the majority of your business transactions are carried out with cash, you run a big risk. Cash is easy to steal as transactions are rarely audited and accounted for. Unethical employees can put half in their pocket and half on the books, directly impacting on your income.  Paper money is hard to audit and track, it is expensive to bank, and often undeclared.

The challenges lie in the land where you are the entrepreneur receiving the cash, but the opportunities lie in helping other people to manage their cash.

The solution: find ways of tracking cash

The business has to be smart. Allow cash transactions to remain a part of the process, but use services that facilitate some of the collections and ease those headaches. Companies often use cash management companies, but their price tag makes handling of cash even more expensive.  Fraud is rife in the cash market. There are many ways to skin a cat, but handling cash in without technology to track it can be dangerous. Any mismatch of manual records and payments needs to be carefully analysed to pick up any discrepancies.

An alternative is to employ a service provider who can manage the cash transactions for you, but this will also be a cost to the business, Retail stores can collect on your behalf, but they want you to pay a service fee.  Understandable costs, but ultimately each one impacts on the bottom line.

The technology opportunity

One opportunity which has already started to edge into the mainstream is the use of eWallets and digital cryptocurrencies. Cash carrying individuals can swap these out for virtual monies that they can use to manage their payments. M-PESA in Kenya is a superb example, even if it never really got a foothold in South Africa.  For the entrepreneur that wants to engage with the cash empowered customer, these solutions could potentially help overcome the hurdles of trust and cost and ensure security on both sides of the fence.

Related: Your To-Do List Can Boost Your Bottom Line

The final countdown

What it boils down to is this – cash exists and cash-based transactions and attitudes are unlikely to change overnight so the entrepreneur needs to invest in solutions and systems that manage and audit transactions carefully. Ensure there are various control measures that can pick up anomalies, give people the opportunity to unpack these anomalies and then identify any issues.

Ultimately, if your business is to successfully avoid the multiple opportunities for fraud in the cash transaction society, then you have to invest in tools that will ensure your cash is properly managed and that you’ve chosen a well-known service provider to do so. Otherwise you’re just swapping cash fraud for technical fraud…

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Business Landscape

Are You Forgetting To Think About Your Business Strategy?

If you want to make money, save money and improve your efficiencies in 2018, you need to keep reviewing your strategy.

Ed Hatton

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It’s hard to keep upwith the pace of change. Economic uncertainty, disruptive technologies, fast-changing consumer needs and complex digital marketing means entrepreneurs have to move fast just to stand still. While managing constant change this is easy, but dangerous to forget about strategy. A couple of pertinent questions: What are your business and marketing strategies? Who owns them? How many people in your organisation understand them? When last did you review them to see if they are appropriate now, and likely to be appropriate in the next year or two?

Every organisation, from tiny businesses, clubs, NGOs and start-ups to much larger companies would benefit by taking time out to review key strategy issues. I suggest you examine whether your target markets are the right ones, and are still buying enough to meet your sales targets. You should ask if your sales channels, pricing policies, promotional messages and the media used are right for the times.

  • Do you really know what your target market needs and how those needs are changing?
  • Are your products and services providing solutions to those changing needs?
  • Does everyone in your organisation know what differentiates you from your competitors?
  • Do you have the right people?
  • Is your financial strategy still sound?
  • What about purchasing or manufacturing — is it still as cost-effective as it could be?
  • What are your competitors doing now?
  • What are they likely to be doing in future?

Related: Guru Ed Hatton on Marketing On A Tiny Budget

Get out of your comfort zone

These are tough questions, but if you ignore them, your organisation may drift along in its comfort zone in the hope that everything will work out. A company that continues to try to sell familiar products to anyone who will buy, and does not know what its competitors are doing is taking very high risks in a changing environment.

The risk increases if your prices reflect your efficiency or otherwise at product procurement rather than the value they deliver to customers. Risk rises to danger levels if few people actually know and understand the strategy, because they will usually keep their heads down and do the same old things.

Start the journey

Strategy development is like a journey. You know the starting point, you decide on your destination (your goals) and then you map out how to get there, which is your strategy. You have to consider the time it will take, the resources you will need, especially money and skills, and how you will know you are still on track (your milestones). Start at the beginning; ‘we know where we are’.

Do not assume everyone has the same idea of where you are, especially your management team; you may be surprised at the distance between perceptions of where you are now. Then set the goals and recognise that the future may not be what you envisage. You will have to be flexible to cater for change in a different economy.

Using questions like those in this article, map out the strategy of how to get there. An outside facilitator is a good idea for a strategy session but if you choose to run it yourself be careful that your management team does not only tell you what you want to hear.

Related: What Should You Cut First When Times Are Tough?

What great strategies are made of

Keys to good strategy in these turbulent times are to really understand your target market needs and provide solutions at a price that the customer regards as fair value. Two other ideals are to provide the products or services in a manner convenient to the customer rather than to you, and to inform the customer of the advantages of your solution in a manner and in media that the customer trusts. You may recognise the venerable 4Ps of marketing in a new guise; outwardly focused, concentrating on the customer.

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