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Finance Insights

5 solutions to manage financial distress & avoid negative cash flow

Francesco Zappalà
Francesco Zappalà CFO, Impresa Pizzarotti

Financial distress is a hot topic in finance these days. And a project’s health is crucial for both investors and management.

It’s quite common for a project to encounter financial distress. It’s part of the risk factors that threaten its creditworthiness. 

Financial distress can happen whether the project’s scope is developing a service, producing an industrial product, building infrastructure, a skyscraper, or a spaceship. 

Projects are implemented in competitive markets and face intense pressure; they can easily fail.

Working in construction, I have experience with financially distressed projects. This article will cover specific examples from construction, but the solutions I provide to overcoming negative cash flow can be applied to any industry.

Why do construction projects encounter financial distress?

Managing a project’s cash flow in the construction and infrastructure industry can be particularly challenging for a general contractor. 

This is due to the growing aggressiveness of the commercial strategies, thin margins, high CapEx, huge amount of workforce, operational complexity, and short deadlines. 

Despite a forecasted positive operating income at completion, a cash crunch can easily shut the operation down.

Identifying financial distress and negative cash flow

Different causes influence the different ways to overcome a negative cash flow. But in any case, the CFO is just like a doctor. Right from the seed stage it’s crucial for them to implement strong budgeting and forecasting tools to predict the early signs, work out a diagnosis, and deliver the best treatment to the patient.

Certainly, dealing with a structural negative cash flow requires much more analysis and strategic decision making than just covering a negative gap for a short period. 

Furthermore, the stage in the project life cycle in which the negative cash position manifests, and the ability to predict it, can make a huge impact in overcoming a difficult situation. 

But financial distress is a predictable concept, and in my experience it usually occurs at the construction and operational stage

The most significant signals can be received quite clearly by monitoring the financial ratios of the organization. Liquidity, debt and financial covering ratios are still very popular accounting-based indicators.

5 ways to handle financially distressed projects

According to my experience as a CFO, after identifying causes of distress, management should be able to take different measures. In fact, there is quite a wide range of solutions to keep the project afloat. 

Nevertheless, every option has pros and cons, and may be implemented in a different order of priority depending on each specific scenario.

There’s no perfect recipe, but here are some of the solutions I’d recommend management to implement as they tackle a financially distressed project.

1. Operational restructuring

The first step to approaching financial distress within sight is to quickly analyze the economic budget of the project. 

Run an operational restructuring, which should focus on generating more revenue, reducing operating assets, and cutting costs in order to improve efficiency and profit margins. This will therefore have a positive impact on the cash inflows and outflows ratio. 

Even if the monthly cash position is positive but the CFO recognizes a negative trend, it is imperative to stop burning cash before getting into real trouble.

In a few cases, it may be that operational restructuring is not a feasible solution. This could be because the price offer was too low following an aggressive commercial strategy, or simply because the tendering math happens to be wrong.

2. The client

The client is the project’s best partner and could be the most affordable and quickest financer in case of financial distress. 

Therefore, nurturing a good relationship is key. The client’s interests are usually aligned with the general contractor’s: continuity of operations and getting the job done. 

Not surprisingly, the first door to knock to ask for money is your client’s. 

In long-term projects, many external factors can impact performance: supply chain issues, increased material or equipment prices, higher salaries, foreign exchange and interest rate exposures, and natural disasters or political crises. These are just a few of a wide range of risks which should be covered in a good construction agreement with escalation formulas or other legal clauses. 

Some of these cases should be discussed with the client and could result in contract variations or scope redefinition, hopefully adding higher-margin activities and cashing them in rapidly. 

Payment terms can also be renegotiated, starting from working out a smoother and faster certification and billing process with the client. In case the construction agreement included an advance payment or client retention, it’s possible to negotiate with the client to try to postpone the repayment, eliminate the retentions, or replace them with bank guarantees or similar.

All these actions can improve the project cash flow without adding high financial costs to the P&L. 

But remember, only a happy client will be willing to help the project out, so you must keep production up and be a trustworthy partner.

Last, if legally and contractually supported, the chance to apply for a claim against the client may be on the table. This is not a preferable option, as it certainly has severely negative impacts on the relationship with the client and the general contractor’s reputation on the market. 

In case of victory, this usually happens at the project completion stage and the window to cash in may be long gone. In my experience, this is a more suitable strategy to raise the project’s economic margin at completion.

3. Suppliers and subcontractors

Right after salaries, materials and services usually represent the most important line in the P&L of a construction/infrastructure project. If not accurately managed, they can heavily impact CoGS and EBIT, while producing an increase in cash outflow.

As with the client, it’s crucial to nurture trusting and close relationships with suppliers and subcontractors to renegotiate the terms of payment if needed. 

In fact, suppliers and subcontractors can turn out to be huge sources of financing. 

As a CFO, I’ve learned that a common practice should be to deal with counterparties with transparency, improve communication, and share the payments schedule with them to let them adjust their cash flow as well. 

Not being clear or, even worse, not disclosing that the project is in financial distress and instead missing payments, could result in disrupting or halting project operations.  This will surely lead to legal complications and reputational impacts that contribute to the project’s failure.

Offering to engage them in a future project to increase their business or giving them better payment terms on another operating project to compensate for their cash flow are just a couple commercial strategies to put in place.

4. Financial solutions

In case of SPVs, financial restructuring involves changes to the debt-to-equity structure, while in general terms it relates to the use of financial instruments or products to improve the project’s  cash flow.

For instance, project debt could be added to lower the pressure of the creditors. Usually, it’s wise to negotiate a working capital solution with a bank from day one to cover temporary gaps in the cash flow. Despite the fact that it’s quite a common product, if the applicant is a recently established SPV with no credit rating and no track record, the financial institution could require some guarantee, causing an increase in the cost of the operation.

In order to shorten the cash collection and stretch the payment terms, factoring or confirming can be used as effective products, especially with investment-grade clients. 

That enables lowering the commissions and activating the product without recourse. No particular track record is required, and they are products offered by many non-banking institutions.

Construction and infrastructure projects are CapEx-intense by definition, therefore it’s possible to improve their cash flow by leveraging on assets on site: leasing and lease-back operations are powerful weapons to use to cash in on large amounts of fresh resources without any impact on site operations.

Buyback options, a percentage of the selling price, and additional guarantees could be required.

If dealing with structural financial distress and in case the project didn’t receive any advance payment from the client, it’s possible to implement a similar operation with a financial institution which will retain a part of the monthly advance certificate. 

This will probably require an advance payment bond, and the lender will constantly monitor the performance of the job; covenants could be required as well.

Finally, in quite extreme cases, the local tax authorities can act as a financier. 

For instance, some countries allow SPVs or taxpayers to postpone a monthly VAT payment. Usually, only organizations which meet certain requirements can submit the request; in some cases, fines apply and it’s a one-time application, useful for very short time frames only.

It’s key to deal with different financial institutions that can offer different products (i.e. installment credit, bank overdraft, loans, letter of credit, etc.), mitigate the debtor risk, and sometimes be able to put them in competition.

5. Shareholders and M&A

To mitigate financial risks from day one, management and shareholders should establish some kind of backup funding that can be called upon to settle debt that is coming due, effectively buying more time for the project to become self-sustaining.

This means that even when the eco-BDG and financial forecast shows a positive net financial position, shareholders should be ready to inject cash, especially if provided by an MOU. 

Every participant in a project’s finance scheme should consider strategies that are designed to mitigate project risk factors that may develop into financial distress. 

This means that shareholders may have to intervene not only financially but also by changing management: to mitigate the potential risks associated with the start-up phase, the parties must provide support to the project team to minimize the time required for it to grow into an effective unit.

Also in the operational phase, changes in the top management team usually make investors, bankers, and creditors confident that poor performance will be dealt with.

Last but not least, in very difficult situations, management should also evaluate whether to merge two or more projects in order to seek synergies and adjust cash flow and operating income.


There are many causes of project failure, and every failed project will have its own set of issues: a substantial proportion of debts, mismanagement, problems with contractors and suppliers, which accumulate and lead projects into financial distress.

There is not a perfect formula to improve project cash flow. In order to minimize the risk of default, management must be able to identify causes of distress that can be controlled by taking different measures.

Even if there is not a perfect mix, management should manage choices according to the specific scenario they face. 

Consider the cost of the operation and the impact on the bottom line, timing, the phase of the project, operational risks, reputational damages, and act accordingly by implementing the appropriate solutions. 

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