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ESG Diligence: The Key To Sustainable M&A Transactions
AAB / Blog / Financial Modelling Benefits: A Guide for Construction Businesses
BLOG13th Mar 2024
By Euan Middleton
or reach out to a member of our Corporate Finance team.
In the ever-changing and competitive landscape of the construction industry, it’s vital for companies to use every tool at their disposal to stay ahead of the curve. One such strategic tool is financial modelling, a critical element in fiscal management, risk mitigation and the planning process.
But why is financial modelling so vital for the construction industry? The answer lies in its capability to forecast future performance, enhance long-term financial planning and analyse the impact of strategic decisions. Combined, these ensure that construction businesses have a clear financial roadmap ahead. By applying financial decision-making in construction through robust models, companies can gauge:
Financial modelling for construction businesses is an intricate process that goes beyond standard financial statements to an elaborate planning system which builds in revenue and profit drivers, as well as unique industry challenges. Financial models help businesses in the construction industry in appraising project viability, investment opportunities, and facilitate effective cash flow and cost management.
An effective financial model for a construction business should rely on historical performance, operational strategy, market conditions, industry trends and projections, encompassing the following key components:
To create an insightful financial model, a step-by-step process should be followed:
With a comprehensive financial model, construction firms can simulate how strategic decisions, like entering a new market or adopting a new technology, impact their financial future. This forward-looking approach provides a considerable competitive advantage by enabling data-driven strategies which consider pricing, procurement, and project delivery timelines. Furthermore, the construction industry is notorious for its relatively low margins and comparatively long collections cycle presenting potential working capital concerns. A financial model plays a crucial role in managing working capital effectively for a business.
The financial analysis of major projects is pivotal. Large projects carry substantial risks and implications for the company’s financial health. A well-constructed financial model illuminates these factors, identifying funding gaps and guiding leaders through the complex decision-making process necessary when embarking on significant projects.
The results derived from a well-crafted financial model streamline the preparation of board packs and underscore potential challenges in the upcoming months and years. When entering partnerships or negotiations with significant stakeholders, such as lenders, a financial model is invaluable during discussions as it offers a robust tool in dissecting terms of contracts, evaluating profitability, and provides reassurance, strengthening negotiations.
Financial models can also incorporate elements of sustainability by budgeting for green technologies and processes and projecting their long-term financial planning benefits. This approach aligns with corporate responsibility and the increasing importance of sustainable practices within the industry.
In the complex world of construction, financial modelling provides a strategic roadmap and a navigational aid in the ever-shifting industry. It delivers clear insights for strategic financial forecasting, sharpens construction financial analysis, and enhances the proficiency of financial decision-making in construction.
For those seeking to deepen their understanding of financial modelling, the Building Cost Information Service (BCIS) provided by the Royal Institution of Chartered Surveyors offers a rich array of resources and data, including benchmarking and cost analysis within the UK construction industry.
Construction businesses should prioritise the development and utilisation of robust financial models. The benefits outlined are clear. In collaboration with our Construction & Property experts, your business can construct a more robust financial foundation for the future.
If you have any queries about how to begin using financial modelling please do not hesitate to get in contact with Euan Middleton , or a member of our Construction & Property team.
How AAB can help you with
When you need comprehensive, dependable support at any stage of your business journey, our corporate finance team will provide practical and motivating advice to help you progress with confidence. Throughout the landmark events of your business lifecycle, our specialist corporate finance team will guide you with sound, proven advice. AAB corporate finance can help you through the good times of growth and maturity, and be ready to support you should you encounter challenges such as restructuring or litigation.
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