Construction project developers must secure ample working capital to avoid liquidity issues that can impede payments to subcontractors, suppliers, and employees. It rings particularly true for CFOs of infrastructure construction project developers in India dealing with leveraged balance sheets and milestone-driven cash flows.
This article discusses a few strategies to scale working capital growth to maintain the crucial triage of cost-quality-time.
3 Effective Strategies to Boost Working Capital Growth
Generally, CFOs can improve their working capital by either reducing project expenses or delaying payments to have cash on hand. We delve into the finer details below.
#1 Problem: Fragmented Supplier Base
The high complexity of infrastructure projects causes severe fragmentation and communication concerns at the contractor-subcontractor-design interface. Different project phases require multiple specialized suppliers for procuring construction raw materials, such as TMT bars, structural steel, fabrication, electricals & cables, ductile iron pipes, etc. The vendor base may split further for developers constructing several projects at diverse locations, necessitating relationships with local suppliers.
Solution: Vendor Consolidation
Reducing the number of vendors to a select few can simplify supplier management and facilitate the associated procurement process and staff costs by almost 2%. It also fosters stronger supplier relationships and increases supply chain visibility.
#2 Problem: Inconsistent payment terms
Another pitfall of a fragmented supplier base is the sheer breadth of the corresponding payment terms and conditions. As different suppliers have their own custom quotes and payment cycles, a lot of time and effort is spent on staying on track of payments while throwing cash flow monitoring for a toss.
Solution: Payment Terms Standardization
A better way to optimize working capital is to extend and homogenize payment terms across all suppliers while keeping them aligned with cash inflows and project milestones. So, rather than sticking to a 30-day cycle, negotiate for a 45-day working capital rotation period and clear invoices at once, eliminating repetitive tasks and streamlining cash flows.
#3 Problem: Bulk Payment for Raw Material Procurement
Given the colossal requirement for natural or semi-processed raw materials, such as concrete, earthworks, cement, and more, making bulk purchases has become the norm in the construction industry. However, this feature entails further scope for cost savings.
Solution: Discount for Early Payments
While unit costs for construction materials, reduce when purchased in huge quantities, project developers can further lower the expenditure by negotiating for early payment discounts, preferably approximating about 10% on the invoice value.
Example: CFOs Scaling Working Capital Growth by 8X
- Assume a construction project developer follows the strategies outlined in the text and avails of a Rs. 1.5 crore credit from the supplier of raw materials by making early payments.
- Further, the company follows a 45-day payment cycle, which results in 8 (=360/45) working capital rotations in a year.
So, the business manages to unlock additional working capital of Rs. 12 crore (=1.5×8), which can be deployed in other projects as well.
Optimize Supply Chains to Enhance Working Capital Availability
Infrastructure construction companies can improve liquidity, navigate market uncertainties, enhance profitability, and unlock business value by optimizing their working capital and procurement processes. Consolidating vendors to a select group of top construction raw materials suppliers in India and negotiating better terms are some such ways that can be carried out effectively using Moglix’s EPC solutions.
Write to us at info@moglixbusiness.com to learn how our solutions can help you streamline your operations.
