COMPANIES whose operations span a number of sectors and a broad variety of projects put immense demands on FDs and their supporting finance teams.
Nigel Chism, finance director of the UK arm of Kajima, the Japanese-owned global construction and property development company, outlines how he addresses some of the challenges that he faces and that are common to many other FDs in multi-faceted businesses.
Arranging appropriate funding
For any FD in a multi-faceted business, ensuring adequate funding is a major challenge. Projects in different sectors, with varying timescales and a variety of funding sources require careful handling. For example, Kajima’s commercial projects are mostly funded through our own resources and with the backing of our parent company, however our PFI and public private partnership projects are largely funded by bank debt, and are more demanding to arrange.
While self-funded projects offer a degree of flexibility, invariably commercial development projects can result in additional and sometimes unexpected costs and so it’s important to have made provision for this or to have the flexibility in the funding to cover any such eventualities.
PFI type projects are largely funded by banks, typically with senior debt, though in some cases an element of subordinated debt will be included. Banks typically have very strict requirements and these also vary enormously from bank to bank. A further difficulty is that there are a limited number of banks that lend to such projects, where the timescale of the contracts can be up to 30-35 years. Standard areas include, drawdown arrangements, repayment formulas, covenants, representations and default provisions and these can all vary from project to project too so it’s very challenging when you have a number of such projects running at the same time.
Taking a balanced approach to budgeting
When it comes to planning a budget, working across sectors requires quite different approaches. Our commercial projects offer flexibility because the budget is based around how much we decide we want to spend, rather than having a budget stipulated to us. But such projects still have to be carefully budgeted for to ensure they come in on time and on cost.
With PFI projects, which require far longer-term planning, over several decades, budgets must be accurate given the length of the contracts, the lack of flexibility to change terms and the need to meet a set schedule of payments. So there must be a tight focus on areas such as liquidity ratios to ensure that the contract requirements can be met.
Fine-tuning key to financial modelling
Given the need to put a very accurate budget together at the start of a PFI-style project, having finely-tuned financial models is key. Core inputs on costs, repayment conditions, fee schedules and all the other key input factors for the model must be carefully thought through as the long-term nature of such projects means there is little scope to vary terms once the project has started. Having within the finance team individuals who have financial modelling as a core strength is an important consideration.
Managing cash flow is critical
Cash flow is a critical issue both for the business as a whole and for the shorter-term commercial projects and longer-term PFI-style projects we undertake. At a group level we are quite conservative and just hold cash in our corporate accounts and in overnight money market funds. Clearly the longer-term PFI projects require the most detailed cash flow management as there are contracted amounts that we must be paid each month and it’s important to build reserves into any projects to withstand risk.