Sakhile Construction Business Plan — The Working Capital Problem

Why construction consumes cash as it grows: an 18.5% of turnover working capital requirement and a 66-day cash cycle that must be funded.

The Working Capital Problem

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Figure 7. The working capital bridge at Year 5.

Component	Year 5	What it is
Trade debtors	R7.72m	Certified work invoiced and unpaid. Public at 68 days, private at 38.
Retention receivable	R2.86m	10.0% withheld from every certificate, released half at practical completion and half after the defects liability period.
Work in progress	R2.20m	Work done on site but not yet certified. Roughly 19.0 days of direct cost.
Less trade creditors	(R3.16m)	Materials and subcontractors at 42 days. Merchants now work on 30-day terms at best and increasingly cash on delivery.
Net working capital	R9.62m	18.5% of turnover

R’000	Year 1	Year 2	Year 3	Year 4	Year 5
Trade debtors	524	1 309	2 759	5 021	7 722
Retention receivable	231	523	1 045	1 870	2 860
Work in progress	233	478	903	1 526	2 201
Less trade creditors	(265)	(593)	(1 174)	(2 083)	(3 162)
Net working capital	723	1 717	3 533	6 334	9 621
As a share of turnover	17.2%	18.1%	18.6%	18.6%	18.5%
Absorbed in the year	(723)	(994)	(1 816)	(2 801)	(3 287)

Figure 8. Payment days by sector against the 30-day requirement under the Public Finance Management Act.

Figure 9. The cash conversion cycle and its components.

The cycle is 62 days in Year 1 and 66 by Year 5, peaking at 67 in Years 3 and 4 when the public share rises fastest. Debtor days contribute 54.2, retention a further 20.1 and work in progress 19.0, against only 27.3 days of creditor funding. Every one of those components is a decision the contractor makes or a term the client imposes; none of them is inevitable in the amounts shown.

6.1 The six disciplines that shorten the cycle

Never submit a claim without complete supporting evidence. The clock only starts on a valid invoice, and a missing order number or a claim that does not match the order is the most common cause of delay. This is a documentation problem before it is a finance problem.
Certify early and often. Monthly certificates, submitted on the day they fall due, with measurements agreed with the client’s agent in advance rather than argued afterwards.
Chase from day one, not day sixty. Contractors who survive public work are not the ones who complain about late payment; they are the ones who chase it with discipline and a named person responsible.
Negotiate advance and milestone payments on private contracts wherever possible, rather than payment on completion. Private clients are far more willing to agree this than public bodies, and it is the cheapest working capital available.
Price the delay into the bid. Bidding public work at the same rate as a fast-paying private client means funding the state’s delay out of your own margin. The financing cost of 75 days should sit in the preliminaries.
Cap concentration. No more public work at once than the facility can fund through the longest realistic delay.

The financing cost of delay is a real line in the profit and loss account and should be a real line in the bid

At Year 5 the business pays R1.96 million to finance the payment cycle — asset finance interest, discounting interest and the discounting service fee together — against EBITDA of R3.52 million. That is 4.0 per cent of turnover consumed by the gap between doing the work and being paid for it. A contractor who prices a public contract at the same rate as a private one has agreed to fund roughly thirty additional days of debtor at 14.5 per cent, which on a R2.9 million contract is about R34 000 of margin given away before a brick is laid. The remedy is arithmetic rather than negotiation: calculate the financing cost of the expected payment period at bid stage and put it in the preliminaries where it belongs.

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