Group 5 … one of South Africa’s largest construction companies and after relatively good performance few years ago, is on the brink of failure as it applies for business rescue.
Performance of the construction industry usually fluctuates with overall economic cycles. This has been evidenced with Group 5, as past performance was largely positive on the back of the World Cup being hosted in South Africa, power plant projects and a good economy which ensured profitable years for the company. However, the past few years the company has been marred with poor performance mainly due to cash flow constrains from poor performing projects and a downturn in the South African economy.
Not much can be done with overall economic climate in the country at company level, but we argue that the risks of cash flow constraints and its impact on the company as part of the overall risk management can and must be managed during good and bad years. Tail events and its influence on cash flow sensitivities are extremely important to model constantly, as it provides management with the ability to plan for downturn cycles, cost overruns on projects, delayed projects, foreign exchange volatility etc. All these adverse circumstances are not unique and with appropriate risk management approach, mitigations to prepare for these events become easier to deal with ensuring that timing and resource planning are adequate.
The amplification of the risk management function within every facet of a business continuously reminds us of the importance of good housekeeping rules, which are important for long-term sustainability of a business.