Page 6 - Build Strong Resilience in the Real Estate and Construction Sector

PaRT III: Four stePs to Build Business resilience in a crisis

(A) MANAGe breAkeveN pOINT AND COSTS

the concept of a breakeven point and how it helps to better manage costs is important, especially during a crisis. a
breakeven point is the “magic number” that allows a business owner to determine the bare minimum to generate
in order to cover fixed overheads. Companies should look at making adjustments to factors that can change the
breakeven point so that more financial leeway is available to prioritise the better use of funds and resources.

companies need to scrutinise earnings forecasts and start exploring “what if” scenarios using sensitivity analysis.
A simple way of assessing this is by estimating the number of months the company’s finance can withstand their
overheads without receiving any project proceeds, service revenues or even contract incomes.

In order to reduce the breakeven point, a company should either reduce the burden of high overheads and fixed costs ,
reduce the variable cost component by looking at how to improve productivity (for instance) or to charge a higher per
unit fee (through value adding or bundling strategies).

i. Lowering fixed costs
An example of lowering fixed costs is reducing office related expenses such as leases, office utilities, fixed
component of payroll or even disposing non-core assets (which need to be constantly financed).

ii. Lowering variable costs
an example of lowering variable costs could be exploring alternative sourcing for building materials, variable
maintenance expenditures and variable ancillary charges which are sales or top line driven. Business owners should
also be making decisions on which projects to prioritise, and putting more emphasis on projects or contracts that
(when secured) provide healthier gross profit margins.

(b) MANAGe LOAN AND bANkING FACILITIeS

companies need to take stock of banking relationships and loan facilities. this is important as sustained lifelines of
financing are critical in surviving the crisis. Development project financing, construction cost financing and financing for
equipment and properties are the more common banking facilities undertaken in this market segment.

Businesses should match financing objectives with corresponding loan tenures. Other measures to take include
negotiating lower rates and assessing asset valuations which may impact properties serving as debt collateral. once
businesses are able to prioritise repayment schedules into short- and long-term tranches, plans can then be laid out on
how to deploy cash flows to meet these obligations.

(C) MANAGe COLLeCTIONS AND CASh FLOwS

As the saying goes: “In a crisis, cash is king”. Businesses must study cash flow impact in conjunction with breakeven
analysis and financing analysis. A slowdown in collections and debt exposure is inevitable during a crisis, hence
complementing this with best-and-worst-case scenarios will help paint a more realistic cash flow position.

Businesses should analyse the financial health of top customers and explore taking on formal credit recovery measures
for higher risk accounts. as preventative steps, credit scoring, a tighter credit assessment and better due diligence
will help reduce collectability risks in the future. suppliers should also not be ignored as businesses need to engage
and negotiate with their supply chain to design flexible repayment schemes, and manage payment levels to minimise
further cash flow disruption.

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