The recent financial crisis and the resulting economic landscape that construction and contracting businesses face today has demonstrated the importance of being able to forecast as a business. With many companies finding themselves under prepared for the rigours of a downturn, they have turned to often poorly structured forecasts on which to make key business decisions about future direction.

Although the general failure in the economy was sudden and devastating, many commentators are, with visionary hindsight, certain that with the correct systems in place providing visibility of exposure to risk and debt servicing, businesses could have been better prepared for what came to pass.

Where did the problems lie?

For many companies that suffered at the hands of the recession forecasting was a disparate set of spreadsheets spread across multiple business disciplines. These spreadsheets took weeks or even months to properly consolidate and even then were often driven from systems poorly geared up to reactive reporting.

As the financial crisis hit, these companies frantically tried to uncover where their problems lay. But with no clear view or understanding of how and why the problems were occurring, they were unable to react quickly enough to rectify them. In good times this was affordable, in bad times it proved devastating.

In many cases critical information within businesses was being retained in ‘silos’ or ‘islands of data’. With the information being stored disparately and little or no ability to share it, other than through rudimentary uploads, communication between departments was almost impossible. This lack of communication within businesses was often exacerbated by the fact that some ‘owners’ of data such as buyers, estimators, surveyors, sales people, or anyone storing data out of sight from the business as a whole, were unwilling or unable to open the critical information up for general consumption.

Moreover, with confusing, cumbersome and often out of date systems running the processes of many companies, business intelligence was almost non-existent. This meant that many decisions were being made based on inaccurate and out of date information in an economic environment that was changing almost daily.

Another major contributing factor was companies’ willingness to buy contracts, bringing work in to the business at zero, or even a negative margin. This is a high risk strategy at the best of times, but even more so when there is no means of balancing it against a clear and accurate forecast of how it will impact the business as a whole. Getting this wrong has lead to some of the UK construction industry’s most spectacular collapses, with the loss of many jobs and the net effect on the economy as a whole. Recent examples such as Connaught and ROK show how over exposure to debt is often the result of poor risk assessment when entering into deals, including over competitive bidding practices and poor understanding of the cashflow associated with critical projects.

All in all, there were many contributing factors to the economic downturn and the chaos it caused in the construction and contracting industries. Clear forecasting alone may not have been enough to save all businesses from the adverse effects of the recession, but there are many ways in which it could have helped.

How can forecasting help?

To appreciate how forecasting can help, firstly it is important to understand what forecasting truly means and how the processes can be practically implemented to provide tangible results for organisations.

Whilst there are perhaps many reasons for forecasting, there are three key areas that can provide real benefits to businesses, irrespective of industry type.

  1. Visibility – The ability to look into and across your business, accessing any component of a project and analysing its positives and negatives based on real-time data, highlighting where potential problems may lie and being able to take corrective action.
  2. Risk Analysis – With better visibility of your business position, decisions made can be analysed, prioritised and dealt with based on their respective risks. This allows costs to be balanced against forecast revenue and plans to be formulated that address the potential risks that may lie ahead.
  3. Profitability – With accurate information and balanced risk, forecasting allows you to control how and when you take profit from the business, balancing it against project and divisional contingency planning.

How can accurate forecasting be achieved?

There are already forecasting tools embedded within intelligent commercial & financial ERP business management systems such as the ones found in Sage Construction’s range of ERP software solutions, that can help construction and contracting businesses of all sizes achieve the key benefits outlined. However, by stepping back and taking stock, it is apparent that these ERP business management software systems need to play a central role in what is a much wider forecasting strategy that can be brought to day-to-day business processes.

Rather than a single entity, it may be beneficial to think of forecasting as the sum of a number of critical activities and solutions that, when brought together, will help to protect those applying it. Some of the critical factors that may be able to help a business are outlined here.

  • Trend analysis – In order to understand what a forecast is telling you it is essential that you understand the trends underlying your business sector. How are material prices likely to fluctuate? Where are the next phases of investment in private or public sectors likely to come from?
  • Understanding your pipeline – Understanding the business likely to come through the door is fundamental to a forecast. It’s not just about the project itself, but the impact of all projects as a whole on the business in general. It is about understanding how and when payments will be received and the cost expenditure required to meet client requirements, both pre- and post-contract.
  • Educated business teams – Islands of data can be as much about people as they are about systems. Training your users and helping them to understand that everything they do can help to protect your company is critical. Ownership of data is essential; however this is not to be confused with keeping it in isolation, hidden from view until it can be presented in a more favourable light to management teams.
  • Integration (integrated software) – Data should be entered once, but seen many times in many places. Only then can you be certain that information flowing around your business is correct, and if entered in error, only needs amending once, not in multiple spreadsheets by multiple users.
  • Spreadsheets – These are not databases, although many companies use them that way, resulting in many problems for businesses. Surveys have been carried out around the world stating that many spreadsheets in general operation have such fundamental errors that it puts the profitability of a number of large companies into question. With proper controls, security, full testing and deployment as a presentation layer, spreadsheets are in fact a flexible and powerful mechanism for high level reporting.
  • Dashboards – There is no reason that, with technologies such as Sage Project Portal powered by SharePoint and other web based collaboration tools available, critical business information tailored to help each individual perform their role within an organisation can’t be delivered to them through their computer screen. From site managers and surveyors, up to MDs and CEOs, there are unlimited dashboards that can be created that will inform and allow individuals to take actions, driving their specific area of responsibility towards achieving the common goal of the business.
  • Business intelligence (BI) – BI is a broad school, encompassing the systems that generate analytical data that feeds the key performance indicators (KPIs) supplied to individuals through the dashboards mentioned previously. An absolutely fundamental component for successful forecasting, BI is the method of transforming the static data entered into a core business system into a meaningful set of results that can uncover not just the key performance of the business but historic trends that can be used to balance forecasts.

An example of how forecasting can work – Apollo Group

Apollo Group, a UK top 100 construction company, implemented Sage ERP EVision software, one of Sage Construction’s range of ERP solutions, with the objective of being able to forecast effectively.

Historically Apollo Group maintained data in a range of standalone in-house databases, spreadsheets and paper-based ledgers/daybooks in addition to its main finance and payroll software solution. This lack of a cohesive view of critical data meant Apollo Group was unable to generate bespoke reports in response to the needs of the business, making forecasting virtually impossible.

Now, with Sage ERP EVision in place, all Apollo Group’s critical financial and commercial data resides in a single system. This central hub of data makes reporting simple, allowing more quality time to be spent on the high-level review of information because there is no longer a need to check for human errors caused by manually transferring data from one system to another. Reports are now set out exactly as Apollo Group want them, containing charts and graphs that are prepared and updated automatically.

Apollo Group’s use of Sage ERP EVision is a good example of how an ERP business management system can form the central element of a wider forecasting strategy.Apollo Group was able to forecast the business’ growth, while managing risk with up-to-date, accurate information.

Sage ERP EVision provided Apollo Group with a back office system that translated current figures into trends, allowing analysis to be performed in a very short space of time, in some cases instantly. This more efficient process removed the need to have hundreds of people constantly feeding data into a central system, resulting in growth for Apollo Group of 40%, without any significant increase in overheads.

Summary

As an industry it is up to the suppliers of specialist construction and contracting software to provide companies with the tools they need to manage their businesses. However, it is up to the UK construction and contracting industry to adopt these tools and place them at the centre of their forecasting strategies. Only by working together can robust, industry-specific frameworks be built, opening clear paths to accurate decision making through instant, on demand forecasting capabilities.

These lean times, when lots of construction companies and contractors are running at a reduced capacity, offer a perfect opportunity to review and analyse current systems, not just software but business processes as well. Take the chance to ask whether your systems are fit for purpose and when the upturn comes, will they ensure that your business is able to cope with the increases in demand without having to substantially increase human resources to cope with it?

In the simplest terms forecasting is all about managing cashflow. The old adage “turnover is vanity, profit is sanity, cash flow is king” has never been more pertinent than today. Having the correct commercial & financial ERP business management system in place as the central hub of a wider forecasting strategy will go a long way to ensuring you maintain control of your cashflow and business at all times.

To find out how commercial & financial ERP software from Sage Construction can form the central hub of your businesses forecasting strategy; reducing risk and driving profit, call 0845 080 4940, email construction@sage.com or visit www.sageforconstruction.co.uk.