Quarry operators should consider financial repercussions of new contracts

Each day, quarry managers are faced with a myriad of challenges. The ever increasing demands on productivity levels, operating costs and blast performance can be tough for all quarries to meet, regardless of their size.

Sometimes, however, it’s the financial pitfalls you need to be most wary of and, while these should be considered at all times, it is particularly important when you win new contracts.

Capital expenditure

When you’re talking about a large capital expenditure program, your financier needs to know exactly what it’s for. Will it be used to generate new revenue or is it replacement capital expenditure (e.g. financing replacement equipment in your fleet)? If we’re talking the latter, it is likely to increase your debt and, if so, both you and your financier need to plan for that eventuality. It’s important to have a strategy in place to ensure your capital expenditure is occurring in the way you had intended and, where possible, is revenue accruing.

Terms and conditions of the contract

You’ve received the contract for the customer and everything looks pretty good. But do you actually understand it? Both you and your financier need to be extremely clear about the terms and conditions to make certain you are minimising any risk. You need to know how flexible the contract is – is it fixed or does it have variable allowances? If there is a fixed cost and time frame in which the job needs to be delivered, it could mean you’re stuck with the losses incurred when a project goes overtime or over budget.

Effect on cash flow

A new project means improved levels of cash flow, right? Not necessarily. In fact, when a new project comes into play, the drain on cash flow can be substantial and the old adage “cash is king” rings true in this situation. By having a detailed cash flow budget, including some sensitivity analysis and what-if scenarios, you will be far better equipped to understand the impact of unforeseen events and/or delays in cash flows on the project and overall business.

Operational considerations

You need to think about a range of “soft” issues which can sometimes – and unexpectedly – be the ultimate undoing of a business. Is this project opening up channels in other geographical areas? Are you prepared for that? Will the increased level of equipment you need be available in time? Will you have the staff levels to cope with the increased workload and deliver on the project? These things might not seem important when you first win a contract, but without proper planning they can become very real concerns.

Ratios

Keep an eye on your financial ratios. If you win another project when you’re geared to the teeth, it’s going to be far harder to secure the, say, $5 million debt needed to put on new people and equipment. These ratios should be set around profit, gearing and working capital and should be communicated to your financier on a regular basis. This becomes easier when your financier understands the value of your plant and equipment so can give you a realistic idea of your position. By being vigilant, you’ll be able to take advantage of new business opportunities as they arise.

Where is the funding?

What is the optimal funding product? Is it off the balance sheet and does the term of the funding match the economic life of the asset? Does the funding structure reflect your company’s strategy for supporting new business? As a rule, larger public companies tend to prefer funding via off the balance sheet products as it reduces residual risk associated with substantial asset ownership, plus assists with financial gearing.

Smaller to mid-sized organisations concentrate on loan products that extend the term of repayments to ensure cash flow can support the project requirements. They also use their plant and machinery as the principal security supporting the required loan structure.

Keeping these considerations in mind will make it much easier to enjoy the fruits of your labour – without the worry of ending up in financial trouble. Remember: it’s about the success of your business as a whole, not of one specific project. Don’t jeopardise your overall organisation for the sake of one risky deal.

Stuart Teasdale, Associate Director, Daniel Blizzard, Executive Director, Equipment Finance, GE Commercial Finance.

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