This article was written by Dr. Nirmalarajah Asokan, Senior Content Marketing Manager at Agicap in Berlin.
Liquidity management is often a major challenge, particularly in the construction and property sectors. Developers frequently have to coordinate several projects simultaneously, all at different stages of construction.
Staying on schedule and meeting deadlines is vital to stop everything from grinding to a halt. This means that new projects and investments must be planned and credit lines negotiated or adjusted accordingly. Developers also need to make sure that all projects stay within budget. In this article, you will find out how digital tools can help with these challenges.
Challenges in the construction sector
When it comes to liquidity management, property developers face two core problems:
1) Project complexity
Not only do they have to stay on top of multiple projects running simultaneously, but each project involves several different actors requiring coordination.
Subcontractors and material suppliers want to be paid on time, while project developers also require prompt payment from business partners. This makes keeping a close eye on liquidity essential.
2) Legal provisions
Strict German construction regulations mean that they must comply with a host of rules and time limits. As they are only permitted to divide the total amount for a construction project into seven separate payments, they need to plan the individual project phases precisely and finance them in advance.
But the end purchaser only delivers these payments once a specific construction phase has been completed. Payment delays risk the project’s liquidity and may also affect other projects. Keeping the project on track and running smoothly can prevent this.
These two challenges alone make financial and logistical project management difficult. It is, therefore, no surprise that developers are increasingly looking for digital tools, both for liquidity issues and in general.
Liquidity management in the past
Be honest: Is your idea of digital liquidity management an Excel spreadsheet? If so, you are certainly not alone. The tried-and-tested Microsoft Office tool is still the solution of choice when it comes to liquidity planning. This is because many users are unaware of any alternatives. However, Excel does have a number of drawbacks, namely :
- Data entry is time-intensive
- Manual entry of account balances and transactions can lead to mistakes that can falsify liquidity planning
- The liquidity overview is often not up to date, as daily updates are not always manageable or realistic
These issues make it difficult to coordinate construction projects, as developers never have a precise picture of current liquidity. As a result, this potential for making development projects more efficient often goes to waste.
Liquidity management today
There are now many digital tools available that are specially developed for liquidity management and can make life much easier for project developers and financial officers.
1) Time savings
The biggest advantage of digital tools is the enormous amount of time they save. Liquidity management software like Agicap synchronises automatically with the bank servers that store business accounts, checking account transactions and balances every day. This makes manual data entry a thing of the past, giving staff more time for analysing and planning liquidity. In short: project developers can work faster and concentrate on the really important things.
2) Cost optimisation
Specialised liquidity management software can also help save money. By allowing individual expense categorisation, it lets financial officers quickly identify high-cost items. This provides detailed insights into the costs of an individual project or even the construction company’s entire cost structure.
An in-depth cost analysis can then help managers find areas for savings, thus having a positive long-term effect on liquidity.
3) Greater transparency
A liquidity planning tool lets users take a close look at the important aspects. At the push of a button, project developers can get an overview of the liquidity status of a specific project, for example. They can, therefore, quickly check whether enough funding is available to start the next project phase.
If a project is delayed because a supplier cannot deliver the required material, the financial impact can be reflected in the liquidity planning. If the stop in construction leads to delays in customer payments, developers can estimate weeks or months in advance whether this could jeopardise liquidity and take necessary measures.
4) Consolidation at all levels
Big players in the construction sector often have subsidiaries with their own business accounts and financial structure. This makes consolidation necessary in liquidity management, both for the subsidiary and the parent company.
Good digital tools can quickly show the liquidity of a specific subsidiary and its impact on overall group liquidity. This makes efficiently managing liquidity within the group easier.
5) Simple simulation of liquidity scenarios
When using Excel, developers often do not have the time to create multiple liquidity forecasts. As a result, most developers simply use the central, most realistic scenario.
Creating additional liquidity forecasts can be worthwhile, however. A pessimistic scenario, for example, can act as a financial stress test for the company. Simulating a construction standstill lasting several months enables the business to estimate how long they could continue before payment problems set in.
In turn, managers can think about how they would react to such a serious situation and would know what to do if it ever happened. They would, therefore, not be taken by surprise, allowing them to stay calm and keep a cool head in difficult times.
About the author:
Dr Nirmalarajah Asokan is Senior Content Marketing Manager at Agicap in Berlin. He specialises in liquidity management, cash flow and financial planning. He is currently responsible for content marketing for the liquidity management tool Agicap.